 View Question
Q: Present Value Lease Problem ( Answered ,   0 Comments ) Question
 Subject: Present Value Lease Problem Category: Business and Money > Finance Asked by: lily3_98-ga List Price: \$5.00 Posted: 01 Oct 2005 09:39 PDT Expires: 31 Oct 2005 08:39 PST Question ID: 575017
 Mr. Lease has been hired by Cameltrod to provide lease financing for a machine that would assist in automating a large part of their current assembly line. Annual lease payments will start at the beginning of each year. The purchase price of this machine is \$200,000, and it will be leased by RBH for a period of 5 years. LRU will utilize straight line depreciation of \$40,000 per year with a zero book salvage value. However, salvage value is estimated to actually be \$35,000 at the end of 5 years. LRU is required to earn a 14%, after-tax rate of return on the lease. LRU uses a marginal tax rate of 40%. Calculate the annual lease payments. (Remember, these payments are to be considered at the beginning of each year?annuity due.) A. Calculate the amount to be amortized. This would be the cost of the machine less the PV of the after tax salvage value of the machine and less the PV of the depreciation tax shield B. Calculate the annual after-tax required lease income. Calculate it as an annuity due?a beginning of the year payment.) Take your answer from Step A as a present value, and using the number of years and the required rate of return, calculate the payment. C.Calculate the lease payment. You need to adjust for the appropriate tax rate. Therefore, take your answer in Step B and divide it by (1 - the tax rate). This will give you the required lease payment. Subject: Re: Present Value Lease Problem Answered By: omnivorous-ga on 01 Oct 2005 10:06 PDT Rated: lily3_98-ga rated this answer: and gave an additional tip of: \$5.00 Great response and explanation, thanks!  