Question

In: Finance

Dole Company (Lessee) desires to lease a piece of equipment from Deere & Company (Lessor). The...

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~

Solutions

Expert Solution

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


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