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Homework answers / question archive / If a firm can buy a machine for $100000, takes an investment tax credit of 20%, and lease out the machine for 9 years with lease payments at the beginning of the year, how much should the minimum annual lease payments be? Assume a 5-year straight-line depreciation, zero salvage and a tax rate of 40%

If a firm can buy a machine for $100000, takes an investment tax credit of 20%, and lease out the machine for 9 years with lease payments at the beginning of the year, how much should the minimum annual lease payments be? Assume a 5-year straight-line depreciation, zero salvage and a tax rate of 40%

Finance

If a firm can buy a machine for $100000, takes an investment tax credit of 20%, and lease out the machine for 9 years with lease payments at the beginning of the year, how much should the minimum annual lease payments be? Assume a 5-year straight-line depreciation, zero salvage and a tax rate of 40%. Assume further that it can borrow at a before tax rate of 8%.

Group of answer choices

 

 

$10,100

 

$12,100

 

$11,200                                                          

                                                                                    

                                                                                   

 

$9,300

 

$10,500

 

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Computation of Minimum Annual Lease Payment:    
Interest Rate 8%  
Tax Rate  40%  
After-tax Cost of Debt (Interest Rate*(1-Tax Rate) 0.048  
     
Cost of Machine 100000  
Usefule Life 5 Years
Depreciation (Cost of Machine/Useful Life) 20000  
Tax Rate 40%  
PVAF @4.8% for 5 Years 4.353518  =(1-(1+4.8%)^-5)/4.8%
Present Value of Tax Savings on Depreciation (..F@4.8%*Tax Rate) 34828.14  
     
Cost of Machine 100000  
Tax Rate @20% 20000  
Present Value of Tax Savings 34828.14  
Net Cost (Cost of Machine - Tax - Present Value of Tax Savings) 45171.86  
PVAF @4.8% for 9 Years  7.171555  =(1-(1+4.8%)^-9)/4.8%
Minimum Lease Payment (Net Cost/PVAF @4.8% for 9 Years) 6299  
So, Minimum Annual Lease Payment is of $6,299 or $6,300    

 

As we can see that Minimum lease payment is of $6,300 which is not given in the option. So, May be there is some mistake in options.

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