Question

An asset costs $670,000 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 percent and the lessee can borrow at 7.5 percent. The corporate tax rate is 23 percent for both companies. a. What would the lease payment have to be to make both the lessor and lessee indifferent about the lease? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Assume that the lessee pays no taxes and the lessor pays taxes. For what range of lease payments does the lease have a positive NPV for both parties? (Enter your answers from lowest to highest. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Lease payment a. b. Lease payment range to

Answer 1

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PE EPS, STOCK DIVIDEND-Microsoft Excel File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut AutoSum General A A Wrap Text Calibri 11 Fill Copy A Merge & Center Conditional Format Insert Delete Format Paste BIU S % Cell Sort & Find & 2 Clear Format Painter ble Styles er Select Formatting Font Clipboard Alignment Number Shules Cells Editing KL325 KE KF KD KG KH KI KJ KK KL KM KN KC KP 307 308 309 COST OF ASSET 670000 310 NOTE PVIFA @5.775%, 3 YEARS 2.684178 311 LIFE IN YEARS 3 312 DEPRECIATION 223333.33 313 TAX RATE 23% 314 DEPRECIATION TAX SHIELD = 51366.67 [223333.33 X 23%] 315 7.50% [LESSEE'S BORROWING RATE 5.7750% [7.50%* (1-0.23)] 316 BORROWING RATE 317 AFTER TAX BORROWING RATE 318 319 FIRST WE WILL CALCULATE THE LEASE PAYMENT WHICH WILL SATISFY BOTH 320 THAT IS NAL (NET ADVANTAGE OF LEASING) 0 321 COST OF ASSET - OCF X PVIFA@ 5.775% , 3 YEARS 322 NAL= 323 0 = 670000 8 670000/2.684178 324 OCF= 249610.82 325 14 H MARGIN MONEY marginal tax EVA MVA LEVERAGED BUYSWAP PB ROPI APV ROSSprice quote distress BRIGHAN Sheet2 CAP GAIN Sheet1 Sheet3 130% O Re erences: AL125 10:03 ENG 18-06-2019

PE EPS, STOCK DIVIDEND-Microsoft Excel File Home Insert Page Layout Formulas Data Review View Add-Ins - Cut AutoSum A A Wrap Text Calibri 11 General Fill ECopy A- Merge & Center Conditional Format Insert Delete Format: Paste BIU S % Cell Sort & Find & 2 Clear Format Painter Formatting ble Styles er Select Clipboard Font Alignment Number Shules Cells Editing KL325 KD KE KE KG KH KI KJ KK KL KM KN KC KP 325 AFTER TAX LEASE PAYMENT 326 OCF = DEPRECIATION TAX SHIELD 249610.82 = AFTER TAX LEASE PAYMENT +51366.67 327 328 AFTER TAX LEASE PAYMENT- 198244.16 329 BEFORE TAX LEASE PAYMENT 257459.95 198244.16/(1-0.23)] 330 331 332 ANSWER 1 THIS IS THE BREAKEVEN LEASE PAYMENT 257459.95 THIS IS ALSO THE AMOUNT FOR LESSOR 333 FOR BREAKEVEN 334 NOTE: 335 NOW FOR LESSEE, BREAKEVEN POINT IS PVIFA @7.5%, 3 YEARS 336 NAL= COST OF ASSET - PMT X PVIFA@ 7.5%, 3 YEARS 2.600526 670000 PMT X 2.600526 337 0= 670000/2.600526 338 PMT = 257640.21 339 THIS IS THE BREAKEVEN LEASE PAYMENT 340 257640.21 THIS IS THE AMOUNT FOR LESSEE 341 FOR BREAKEVEN 342 343 ANSWER 2 THE RANGE WILL BE : 257459.95 TO 257640.21 4 H MARGIN MONEY distress BRIGHAN CAP GAIN Sheet1 Sheet2Sheet3 PB ROPI APV ROSS price quote EVA MVA LEVERAGED BUY SWAP marginal tax 130% O Re erences: AL125 10:03 ENG 18-06-2019