Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
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%. 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
Expert Solution
| 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.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
