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In: Finance

NYC Limo has a client who will sign a lease for a limousine. Consider a $90,000...

NYC Limo has a client who will sign a lease for a limousine. Consider a $90,000 limousine that will last for four years and can be depreciated on a three-year MACRS schedule. Assume that lease rates for old and new limousine are the same and that Acme Limo Inc's pretax administrative costs are $9,000 per limousine per year (these costs will occur at the beginning of the year). The after-tax cost of capital is 8% and the tax rate is 20%. The limousine is expected to be sold for $15,000 at the end of 4 years. The Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. What is the break-even operating lease rate for the limousine?

Use the following table for depreciation-MACRS Rates for three year asset-Half Year Convention

Year %

1 33.33%

2 44.45%

3 14.81%

4 7.41%

Please choose all correct answers. However, if you choose a wrong answer, then each incorrect answer will reduce the score by 10%

1. The cash flow for year 4 is $9798 to 9802

2. The cash flow at year 2 is 685 to 695

3. The break-even leasing payment before tax is $31960 to $31970

4. The breakeven leasing payment before tax is $31940 to 31950

5. The break-even leasing payment after tax is $25550 to $25560

6. The cash flow at year 0 is -$97,200 (that's a negative sign just in case it's not clear)

7. The cash flow at year 2 is $696 to 700

8. The break-even leasing payment after tax is $25560 to $25570

9. The break-even leasing payment after tax is 25570 to 25580

10. The cash flow for year 4 is $9805 to 9810

11. The cash flow at year 0 is -$97,000 (that is a negative sign just in case it's not clear)

12. The break-even leasing payment before tax is $31950 to $31960

Expert Solution


	BREAKEVEN OPERATING LEASE

	Initial Cash Flow(year0)	($90,000)

	ANNUAL DEPRECIATION & DEPRECIATION TAX SHIELD			(Tax Rate=20%)
	N	A	B=A*$90000	C=B*20%	D=C/(1.08^N)
	Year	Depreciation Rate	Annual Depreciation	Depreciation Tax shield	Present Value of tax shield
	1	33.33%	$29,997	$5,999	$5,555
	2	44.45%	$40,005	$8,001	$6,860
	3	14.81%	$13,329	$2,666	$2,116
	4	7.41%	$6,669	$1,334	$980
				SUM	$15,511
	Present Value of Depreciation tax shield	$15,511
	Before tax salvage value	$15,000
	After tax salvage value	$12,000	(1500*(1-0.2)
	Present Value of Salvage	$8,820	(12000/(1.08^4))

	Present Value of total cash inflow	$24,332	(8820+15511)
Pv	Net Initial Cash Outflow=90000-24332=	$65,668
Rate	Cost of capital	8%
Nper	Number of years of lease	4
Type	Beginning of year cash flow	1
PMT	AnnualCash inflow required for breakeven(after tax)	$18,358	(Using PMT funstion of excel with Rate=8%,Nper=4,Pv=-65668,Type=1)
	Excel Command: =PMT(8%,4,-65668,,1)
	Lease income(before tax)	$22,947	(18358/(1-0.2)
	Administrative expense	$9,000
	Break even Lease payment before tax	$31,947

4	Break even Lease payment before tax is $31940 to $31950

jeff jeffy answered 8 months ago

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