An asset costs $840,000 and will be depreciated in a straight-line manner over i

Question

An asset costs $840,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 5.8 percent and the lessee can borrow at 8.8 percent. The corporate tax rate is 34 percent for both companies.

An asset costs $840,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 5.8 percent and the lessee can borrow at 8.8 percent. The corporate tax rate is 34 percent for both companies.

Explanation / Answer

In tis sum we have been provided with the information that

An asset costs $840,000

depreciated in a straight-line manner over its three-year life

. It will have no salvage value.

The lessor can borrow at 5.8 percent

the lessee can borrow at 8.8 percent.

The corporate tax rate is 34 percent for both companies

(a)

Taxes are paid at the end of the year . Depriciation will reduce incometax to lessor by $ 9520

So from above calculation we could say that lease payment equal to $ 58,458 equally well off

(b) In this example we have been provided that lessor has 34 % tax bracket and lesse is in nomtax brackate

so any lease above 19486 will be positive for lessor

Any cash flow that produce positive NPV will good for lesse i.e it may fall beetween 20,000 to 30,000 lease payment per year

Year0 Year 1 Year 2 Year 3 Purchase $ 84,000 Depreciation $ 28,000 $ 28,000 $ 28,000 Tax percentage 34%   34% 34% Tax rebate $ 9,520   $ 9,520   $ 9,520 Pv Factor @ 8.8 Lessor 1 0.9452 0.8933 0.8444 prasent Value 84,000 8998.11 8504.83 8038.59 PV of lease 58458 Pv factor@8.8 for lesse 1 0.9191 0.8448 0.7765 Lease per year 19486 19486 19487

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.