Question

Alpha and Sim Leasing Case Alpha, a tax-exempt institution, needs a new server to automate and integrate its various functions. The firm can borrow funds at 7% and buy it for $309,000. Alternatively, Sim Leasing Inc. offers to lease a server to Alpha on a five-year lease. Alpha will pay Sim $76,000 every year at the beginning of each year. The server has no value after five years. Should Alpha buy or lease? Consider the lease from Sim's perspective. Assuming Sim is in the 21% tax bracket and its cost of capital is 6% Is it a positive NPV investment for Sim? What is the minimum lease payment that Sim must require assuming its administrative expenses amount to $500 per year? What is the maximum payment that Alpha can be charged? The 5-year MACRS 18 Year Depreciation (%) 1 20 2 32 3 19 4 12 5 12 6 S

Answer 1

Answer: Summarized the information and data provided in the question, Alpha, a tax exempt institution, needs a new sequera--- Present value of Lease payments to alpha. 7600/6Ax(1-1/1:0795) * 1.87 $ 33342.81 - As the PV of lease is higher than purchase, Alpha' should purchase. - the cash flows for Sim' are calculated and given below, pu of After tax lease payments 76000X0.79 10.06x{1-V1.06)1.06 $268084.94 PU of Depreciation tax benefit 309000X0.81X60-9/106 +0.32/106427 019/1.0643 +0.12710894 +0.12/1.0645)

$53062.37 NPV = -309000+ 268084-94753062.37 $ 12147. 31 * The Curodent Investment is Positive NPV Investment for 'Sim' het, the minimum required Lease payment is SA, then -309000+ Ax 0.79/0.06x(+1/10695) *1.06+ 53062.27 5500x 0.79/0.06x(-1/100615) =0 => 3:397767 X 1.06XA +53062:37–309000 + 1663.88 -> A = $73028.03 > Alpha can be charged an amount equivalent to the Equivalent Annual cost of the purchase. » So, if the amount charged to Alphou as Lease payment is $x at the beginning of each year for 5 yearos, then $x/0.07x (1–171.07^5)x1.07 c 309000 X = $704431.99 please please kindly Up-vote Thank you