1. Calculate the lease payments in arrears if the equipment cost is $500,000 and the lessor’s...

1. Calculate the lease payments in arrears if the equipment cost is $500,000 and the lessor’s rate is 10%. Assume a five equal annual repayments and a residual of 20% at the end of year five. The lessee’s debt rate is 6%.

2. Shine Ltd is considering purchasing or leasing new equipment. If it purchases the equipment it will cost $500,000 and if it leases the equipment it will be required to pay six rentals of $115,000 each. The equipment can be depreciated over three years on a straight-line basis for tax purposes. The residual value is expected to be zero and the tax rate is 30%. What is the incremental cash flow in Year 3 for leasing the equipment rather than buying it for Year 3? Assume that rental payments are paid at the beginning of each period.

3. Polycorp is about to lease mining equipment worth $1,500,000. The corporate tax rate is 20% and the equipment can be depreciated on a diminishing value basis of 30% over 4 years (salvage value is zero). Polycorp’s cost of debt is 8%. Calculate the present value of the tax savings from the depreciation foregone? Assume tax is paid in the year of income. Assume the remaining balance is added to the depreciation for year four.

Expert Solution

ekkarill92 answered 1 year ago

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