Question

Dole Company (Lessee) desires to lease a piece of equipment from Deere & Company (Lessor). The equipment will cost $100,000. The lease term will be 5 years. Lease payments will be made at the beginning of each year. Deere expects to depreciate the equipment on a straight-line basis to 0. The salvage value is expected to be $10,000. Deere’s tax rate is 40%, and its opportunity cost is 11%. What lease payment should Deere charge Dole for the equipment?

Please show your all work! Thank you so much~

Answer 1

Salvage value	Amount
Salvage value	10,000.00
Less: tax	(4,000.00)
After tax	6,000.00
× PVAF	0.59345
Present value of salvage	3,560.71

Particulars	Amount
Cost of asset	100,000.00
Less: present value of salvage	(3,560.71)
Balance recovery	96,439.29
/ PVAF due	4.10245
Annual after cash flow	23,507.76
Less: depreciation	(20,000.00)
Net income	3,507.76
Add: taxes	2,338.50
Income before tax	5,846.26
Add: depreciation	20,000.00
Annual lease payment	25,846.26

Minimum lease payment is $25,846.26