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# course hero 14 - 4)Setting the lease price Raymond Rayon...

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4)Setting the lease price: Raymond Rayon corp. wants to expand its manufacturing facilities. Liberty leasing corp. has offered Raymond Rayon the opportunity to lease a machine for \$1,500,000 for six years. The machine will be fully depreciated by the straight -line method. The corporate tax rate for Raymond Rayon is 25 percent, whereas Liberty leasing has a corporate tax rate of 40 percent. Both companies can borrow at 8 percent. Assume lease payments occur at year -end. What is Raymond's reservation price ? What is liberty's reservation price? What is Raymond's reservation price ? Raymond ( lessee) Reservation Price of Lessee: (this is the most that the lessee should ever pay) Value of equipment= \$1,500,000 Tax rate= 25% Cost of borrowing= 8% After tax cost of borrowing = cost of borrowing x (1-Tax rate)= 6.00% =8.% x (1- 0.25) This is the discount rate we will be using to discount the cash flows n= 6 r= 6.00% PVIFA (6 periods, 6.% rate ) = 4.917324 NPV of lease = cost - Reservation price x (1-tax rate) x PVIFA ( r, n) Equating NPV to zero Reservation price= Cost / {(1-tax rate) x PVIFA (6%,6)}= \$406,725 =\$1,500,000 / ( 4.917324x (1-0.25))

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