CHAPTER 26
Leasing
Answers to Practice Questions
1.
“100 percent financing” is not an advantage unique to the lessee because
precisely the same cash flows can be arranged by borrowing as an alternate
source of financing for the acquisition of an asset.
2.
a.
For comparison purposes, the solution to Quiz Question 5 is shown below:
t = 0
t = 1
t = 2
t = 3
t = 4
t = 5
t = 6
Initial Cost
3000.00
Depreciation
600.00
960.00
576.00
345.60
345.60
172.80
Depreciation tax shield
210.00
336.00
201.60
120.96
120.96
60.48
Aftertax admin. costs
260.00
260.00
260.00
260.00
260.00
260.00
Total
3260.00
50.00
76.00
58.40
139.40
139.40
60.48
PV(at 9%) = $3,439.80
Breakeven rent
1082.30
1082.30
1082.30
1082.30
1082.30
1082.30
Tax
378.81
378.81
378.81
378.81
378.81
378.81
Breakeven rent after tax
703.49
703.49
703.49
703.49
703.49
703.49
PV(at 9%) = $3,439.82
Cash Flow
2556.51
653.50
779.50
645.10
564.46
564.46
60.48
In the above table, we solve for the breakeven lease payments by first
solving for the aftertax payment that provides a present value, discounted
at 9%, equal to the present value of the costs, keeping in mind that the
annuity begins immediately.
Then solve for the breakeven rent as
follows:
Breakeven rent = $703.49/(1 – 0.35) = $1,082.30
If the expected rate of inflation is 5 percent per year, then administrative
costs increase by 5 percent per year.
We further assume that the lease
payments grow at the rate of inflation (i.e., the payments are indexed to
inflation).
However, the depreciation tax shield amounts do not change
because depreciation is based on the initial cost of the desk.
The
appropriate nominal discount rate is now:
(1.05
×
1.09) – 1 = 0.1445 = 14.45%
These changes yield the following, indicating that the initial lease payment
has increased from $1,082 to about $1,113:
240
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View Full Documentt = 0
t = 1
t = 2
t = 3
t = 4
t = 5
t = 6
Initial Cost
3000.00
Depreciation
600.00
960.00
576.00
345.60
345.60
172.80
Depreciation. tax shield
210.00
336.00
201.60
120.96
120.96
60.48
Aftertax admin. costs
260.00
273.00
286.65
300.98
316.03
331.83
Total
3260.00
63.00
49.35
99.38
195.07
210.87
60.48
PV(at 14.45%) = $3,537.83
Breakeven rent
1113.13
1168.79
1227.23
1288.59
1353.02
1420.67
Tax
389.60
409.08
429.53
451.01
473.56
497.23
Breakeven rent after tax
723.53
759.71
797.70
837.58
879.46
923.43
PV(at 14.45%) = $3,537.83
Cash Flow
2536.47
696.71
847.05
738.20
684.39
712.56
60.48
Here, we solve for the breakeven lease payments by first solving for the
aftertax payment that provides a present value, discounted at 9%, equal
to the present value of the costs, keeping in mind that the annuity begins
immediately.
We use the 9% discount rate in order to find the real value
of the payments (i.e., $723.53).
Then each of the subsequent payments
reflects the 5% inflation rate.
Solve for the breakeven rent as follows:
Breakeven rent = $723.53/(1 – 0.35) = $1,113.13
b.
With a reduction in real lease rates of 10 percent each year, the nominal
lease amount will decrease by 5.5 percent each year.
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 Spring '09
 myers
 Leasing, Corporate Finance

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