Question

An asset costs $560,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 7.5 percent and the lessee can borrow at 9 percent. The corporate tax rate is 24 percent for both companies.

a. What lease payment will make the lessee and the lessor equally well off?

b.	Assume that the lessee pays no taxes and the lessor is in the 24 percent tax bracket. For what range of lease payments does the lease have a positive NPV for both parties?

Answer 1

Both a & b are answered below:

GivenThat,

Asset costs $560,000

three-year life

Depreciation==> 186,666.67

TaxRate ==> 24%

DepreciationTax ==> 186,666.67*24% ==> 44,800

Borrow rate at 9 percent

After Tax the Borrow rate will be ==> 9%*(1-0.24) ==>0.0684==>6.84%

Net Advantage of leasing ==> asset cost-OCF*[email protected]%,3Yrs

after calculations, we get

OCF ==> 560,000/2.6320 ==> 212,765.957

Tax Lease Payment(After)

==> OCF-DepreciationTax

==>212,765.957-44,800

==> 167,965.957

Tax Lease Payment(Before)

==> 167,965.957/(1-0.24)

==> 221,007.838

Finally, Breakeven Lease Payment is $221,007.838

lets calculate for lessee

NAL(Net Advantage of leasing) ==> asset cost-PMT*PVIFA@9%,3Yr

PVIFA@9%,3Yr==2.5313

after calculating we get that

PMT ==> 560,000/2.5313 ==> 221,230.198

Finally, The amount for lessee is ==> $221,230.198

&

The Range is ==> $221,007.838 to $221,230.198