Daymark (lessee) wishes to lease a printing press valued at $60,000 from Wrenn C

Question

Daymark (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the press using 3-year MARCS depreciation rates. Actual salvage value is expected to be $8,000 at the end of 4 years. Under terms of the lease, payments will be made at the beginning of each of the 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lease payment that Wrenn will require from Daymark? Assume a marginal tax rate of 40%.

Explanation / Answer

c. $37,640---answer Initial outlay Less: PV of salvage $8,000(0.636)(0.60) Less: PV Dep Yr. 1 $19,998(0.893)(0.40) Yr. 2 $26,670(0.797)(0.40) Yr. 3 $8,886(0.712)(0.40) Yr. 4 $4,446(0.636)(0.40) the lessor's amount to be amortized $37,640

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