Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 25, Problem 14PS
Taxes and leasing In Section 25-4 we showed that the lease offered to Grey mare Bus Lines had a positive
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ANB Leasing is planning to lease an asset costing $210,000. The lease period will be 6 years. At the end of 6 years, the salvage value is estimated to be $30,000. The asset will be depreciated on a straight-line basis of $30,000 per year over the 6-year period. ANB's marginal income tax rate is 40%, but its average tax rate is only 31.5%. Assuming ANB Leasing requires a 12% after-tax rate of return on the lease, determine the required annual beginning of the year lease payments.
a. $31,592 b. $46,120 c. $45,609 d. $52,653
Bird Wing Bedding can lease an asset for 4 years with payments of $24,000 due at the beginning of the year. The firm can borrow at a 9% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar.
Firm A is considering leasing equipment. The equipment will provide $2.8 million in annual pre-tax cost savings. The cost of leasing is $8.78 million and the equipment will be depreciated straight-line to zero over five years. Assume a tax rate of 21% and a borrowing rate of 7%. Firm B has offered to lease this equipment for payments of $1.95 million per year. Assume that payments for the lease are made at the start of the year.
i) What is the maximum lease payment that would be acceptable to Firm A?
ii) Suppose now Firm B requires Firm A to pay a $600,000 security deposit at the inception of the lease, and this amount is refunded at the end of the lease. If the lease payment is still $1.95 million. Is it advantageous for Firm A to lease the equipment now?
Chapter 25 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Operating leases Acme has branched out to rentals...Ch. 25 - Prob. 9PSCh. 25 - Prob. 10PSCh. 25 - Technological change and operating leases Look at...
Ch. 25 - Prob. 12PSCh. 25 - Taxes and leasing Look again at the bus lease...Ch. 25 - Taxes and leasing In Section 25-4 we showed that...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Prob. 18PSCh. 25 - Valuing leases The Safety Razor Company has a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 22PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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- (1) Assume that the lease payments were actually 280,000 per year, that Consolidated Leasing is also in the 25% tax bracket, and that it also forecasts a 200,000 residual value. Also, to furnish the maintenance support, it would have to purchase a maintenance contract from the manufacturer at the same 20,000 annual cost, again paid in advance. Consolidated Leasing can obtain an expected 10% pre-tax return on investments of similar risk. What are its NPV and IRR of leasing under these conditions? (2) What do you think the lessors NPV would be if the lease payment were set at 260,000 per year? (Hint: The lessors cash flows would be a mirror image of the lessees cash flows.)arrow_forwardCompare the cost of the following leasing agreement with the finance charge on a loan for the same time period: The value of the car is $15,000 at the beginning of the lease period, and its projected residual value at the end of three years is $4,000. The lease requires a $500 down payment. Monthly payment $315 Acquisition fee $300 Disposition charge $150 Other things being equal, one would want to finance this car rather than take this lease if the finance cost were equal to or less than?arrow_forwardReynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 10% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. What will RC report as an interest expense at Year 1? Round your answer to the nearest cent. Enter your…arrow_forward
- ASB is considering leasing a new machine. The lease calls for 9 payments of $1,403 per year with the first payment occurring immediately. The machine costs $8,683 to buy. The present value of CCA tax shield is $998. The present value of its salvage value is $496 and the present value of CCA recapture is $61. ASB firm can borrow at a rate of 10%. The corporate tax rate is 30%. What is the NPV of leasing?arrow_forwardReynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What will RC report as an amortization expense at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What will RC report as the lease liability at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What will RC report as the right-of-use asset at Year 1? Do…arrow_forwardReynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. $ What will RC report as an interest expense at Year 1? Round your answer to the nearest cent.…arrow_forward
- Your firm is considering leasing a new computer. The lease lasts for 4 years. The lease calls for 5 payments of $450 per year with the first payment occurring immediately. The computer would cost $5,900 to buy and would be depreciated using the straight-line method to zero salvage over 4 years. The firm can borrow at a rate of 7%. The corporate tax rate is 21%. What is the NPV of the lease?arrow_forwardYour company is considering the purchase of a fleet of cars for $195,000. It can borrow at 8.5%. The cars will be used for four years. At the end of four years they will be worthless. The corporate tax rate is 34%. The cars belong in CCA class 10 (a 30% class). What is the break-even lease payment? Select one: a. $47,328 b. $57,705 c. $35,675 d. $55,000 e. $56,128arrow_forwardAssume a 10-year lease contract on some equipment with equal lease payments at the end of each year. The equipment would cost $200,000 to buy and would be depreciated straight-line over 10 years to a zero-salvage value. The applicable cost of debt is 10%. The lessee does not expect to owe taxes for the next 15 years while the lessor's tax rate is 21%. What is the Lessee's maximum acceptable lease payment?arrow_forward
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