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
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This note was uploaded on 04/23/2010 for the course BUS Business 1 taught by Professor B.mishra during the Spring '10 term at UC Riverside.

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

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