Acme has branched out to rentals of office furniture to start-up companies. Consider a $5,000 desk....

Acme has branched out to rentals of office furniture to start-up companies. Consider a $5,000 desk. Desks last for six years and can be depreciated on a five-year MACRS schedule. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $800 per desk at the beginning of each year. The cost of capital is 9% and the tax rate is 35%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. What is the break-even operating lease rate for a new desk? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Break-even operating lease rate

Expert Solution

NPV of owning = -5000+PV of depreciation tax shields-PV of after tax administrative costs (annuity due)
Depreciation tax shield is worked out below:
Year	Depreciation %	Depreciation	Tax shield at 35%	PVIF at 9%	PV at 9%
1	20.00	$ 1,000	$ 350.00	0.91743	$ 321
2	32.00	$ 1,600	$ 560.00	0.84168	$ 471
3	19.20	$ 960	$ 336.00	0.77218	$ 259
4	11.52	$ 576	$ 201.60	0.70843	$ 143
5	11.52	$ 576	$ 201.60	0.64993	$ 131
6	5.76	$ 288	$ 100.80	0.59627	$ 60
				4.48592	$ 1,386
NPV of owning = -5000+1386-800(1-35%)PVIFAD(9,6)				4.88965
= 5000+1386-8000.654.88965 =	$ 3,843
Breakeven after tax operating lease rent = 3843/4.88965 =	$ 786
Brekeven before tax operating lease rent = 786/65% =	$ 1,209

jeff jeffy answered 10 months ago

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