Question

Which of the following is NOT a good reason for leasing?

	Reduced uncertainty about the decrease in the asset's value over time.
	Leasing provides 100% financing.
	Tax advantage due to differential tax rates.
	Transaction costs are higher when a firm buys and sells fixed asset than when it leases the assets.
	Used as a hedge to reduce obsolescence.

An asset has installed cost of $250,000, a life of 5 years, a CCA rate of 30%, and a salvage value of $5,000. This asset can be leased for 5 years for $50,000 yearly lease payment, with the lease payments due at the beginning of each year. The lessee's marginal tax rate is 35% and borrowing cost is 10%. What is the NPV of this lease agreement to the lessor if it has the same marginal tax rate of 35%.

Question 3 options:

	$33,839
	-$49,548
	-$43,613
	-$33,839
	$52,652

Answer 1

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13:09 W ' © voraux 3 ENG E. 30-03-2020 ... X IT71 X ✓ fx IK IL I M. IN 10 P Q IR IS IT IU V IWA 71 72 ANS 1 Used as a hedge to reduce obsolescence NOT A GOOD REASON 73 74 CALCULATION OF PRESENT VALUE OF TAX SHIELD 75 76 77 C= COST OF EQUIPMENT d = DEPRECIATION RATE Tc = TAX RATE S-SALVAGE VALUE 250000 30% 35% 5000 PvcCAT = x 195 .... 78 19 r=DISCOUNT RATE 10%*(1-0.35) = 6.50% PVCCATS =(( 250000*0.30*0.35)/(0.065 +0.30))*((1+0.5*0.065)/(1+0.065)) - ((5000*0.30*0.35)/(0.30 +0.065)*(1/((1+0.065)^5))) PVCCATS = 68673.30 83 84 85 STEP 1 NET COST OF PURCHASING = PURCHASE PRICE - PCVVATS 250000 - 68673.30 = 181326.70 NOTE 86 87 STEP 2 PV OF LEASE PAYMENTS = PV OF LEASE PAYMENTS = LEASE PAYMENTS AFTER TAXX PVIFAD @6.5%, 5 YEARS 50000*(1-0.35)*4.425799 = EXCEL: PVIFAD @ 6.5%, 5 YEARS 4.425799 143838.45 STEP 3 PV OF SALVAGE VALUE = 5000 X 1/(1+0.065)^5 = 3649.40 01 92 STEP 1 - STEP 2 - STEP 3 = FOR LESSEE = 33839 STEP 4 ANS 2 NET ADVANTAGE TO LEASING = $ -33,839 [FOR LESSOR] 94 RATIO PI PBP ARR invest, EAA REPLACEMENTS IRRnpvbeta HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BONC ... +