Answers to Session 10 (Ch 21) HW Problems

# Answers to Session 10 (Ch 21) HW Problems - NAL =...

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FIN 620 Dr. Allen Shin Session 10 Answers to HW Problems 2. From Question #1, we calculate cash flows from the lessee’s viewpoint. . Depreciation tax shield = (\$3,000,000/4)(.35) = \$262,500 Aftertax lease payment = (\$895,000)(1 – .35) = \$581,750 Total cash flows from leasing or OCF = \$262,500 + 581,750 = \$844,250 Aftertax debt cost = .08(1 – .35) = .052 Using all of this information, we can calculate the NAL as: NAL = \$3,000,000 – \$844,250 - . - . 1 1 052 40 052 = \$20,187.17 The NAL is positive so you should lease. If we assume the lessor has the same cost of debt and the same tax rate, the NAL to the lessor is the negative of our company’s NAL, so: NAL = – \$20,187.17 4. If the tax rate is zero, there is no depreciation tax shield foregone. Also, the aftertax lease payment is the same as the pretax payment, and the aftertax cost of debt is the same as the pretax cost. So: Cost of debt = .08 Annual cost of leasing = leasing payment = \$895,000 The NAL to leasing with these assumptions is:

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Unformatted text preview: NAL = \$3,000,000 – \$895,000- .-. 1 1 08 40 08 = \$35,646.48 12. The lessee is paying taxes, so will forego the depreciation tax shield if it leases the equipment. The depreciation tax shield for the lessee is: Depreciation tax shield = (\$1,500,000 / 6)(.25) = \$62,500 The aftertax cost of debt for the lessee = .08(1 – .25) = .06 Using all of this information, we can calculate the maximum pretax lease payment for the lessee as: NAL = 0 = \$1,500,000 – \$62,500 - .-. 1 1 06 60 06 – PMT(1 – .25) - .-. 1 1 06 60 06 PMT = \$323,392 For the lessor, the depreciation tax shield = (\$1,500,000 / 6)(.40) = \$100,000 The aftertax cost of debt for the lessor = .08(1 – .40) = .048 Using all of this information, we can calculate the minimum pretax lease payment for the lessor as: NAL = 0 = \$1,500,000 – \$100,000 - .-. 1 1 048 60 048 – PMT(1 – .40) - .-1 1 048 . 60 048 PMT = \$322,731...
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Answers to Session 10 (Ch 21) HW Problems - NAL =...

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