In each of the following cases, derive the interest rate the lessor is implicitly charging in the lease
A company is considering whether it should lease or borrow to purchase a piece of equipment
The lease involves 4 payments in arrears of $7,260, as well as a residual payment
Lease and taxation payments will be made
at the end of each financial year
taxation rate is 50% and the firm has a 12% opportunity borrowing rate.
Such equipment qualifies for 30% reducing balance depreciation if owned, and the equipment is
expected to have a salvage value of $4,000 at the end of year 4.
If the company borrows money to
buy the equipment, what will the tax shield from borrowing be?
Calculate the NPV of leasing and advise the company how they should finance the asset.
The opportunity cost of borrowing for an asset which has a purchase price of $40,000 is 15%.
asset can be depreciated at 20% reducing balance, and has an expected salvage value of $10,000 at
the end of its 4 year life.
The tax rate is 40%.
As an alternative to borrowing to purchase, a finance company has offered a four year lease with
payments at the
end of each year
of $14,706, with a residual payment of $4,000.
Your boss has
refused this offer
, but wishes to persue a lease agreement with 4 payments
, along with
a residual payment of $8,000.
What lease premium will the finance company set for payments
Hint: you need to derive i
from the information given.
Your boss wants to know whether he should go ahead with the lease (instead of the
purchase) based on the new lease premiums calculated in advance.
Provide the calculations
to make this decision.