Bird Wing Bedding can lease an asset for 4 years with payments of $29,000 due at...

Bird Wing Bedding can lease an asset for 4 years with payments of $29,000 due at the beginning of the year. The firm can borrow at a 5% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar.

Expert Solution

Cost of leasing is the present value of lease payments which is calculated as follows:

Present value of lease payments	=	After tax lease payment	*	Present value of annuity of 1
	=	$ 21,750	*	3.788311
	=	$ 82,396

So, cost of leasing is		$ 82,396


Working;

After tax lease payment	=	Before tax lease payment	*	(1-Tax rate)
	=	$ 29,000	*	(1-0.25)
	=	$ 21,750

After tax cost of lease	=	Before tax cost of lease *(1-Tax Rate)
	=	5%*(1-0.25)
	=	0.0375

Present value of annuity of 1	=	((1-(1+i)^-n)/i)*(1+i)		Where,
	=	((1-(1+0.0375)^-4)/0.0375)*(1+0.0375)		i	=	0.0375
	=	3.788311032		n	=	4

ekkarill92 answered 2 years ago

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