ans-odd-problems-ch21

ans-odd-problems-ch21 - CHAPTER 21 LEASING Solutions to...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 21 LEASING Solutions to Odd-Numbered Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. We will calculate cash flows from the depreciation tax shield first. The depreciation tax shield is: Depreciation tax shield = ($3,000,000/4)(.35) = $262,500 The aftertax cost of the lease payments will be: Aftertax lease payment = ($895,000)(1 – .35) = $581,750 So, the total cash flows from leasing are: OCF = $262,500 + 581,750 = $844,250 The aftertax cost of debt is: Aftertax debt cost = .08(1 – .35) = .052 Using all of this information, we can calculate the NAL as: NAL = $3,000,000 – $844,250(PVIFA 5.20%,4 ) = $20,187.17 The NAL is positive so you should lease. 3. To find the maximum lease payment that would satisfy both the lessor and the lessee, we need to find the payment that makes the NAL equal to zero. Using the NAL equation and solving for the OCF, we find: NAL = 0 = $3,000,000 – OCF(PVIFA 5.20%,4 ) OCF = $849,969.49 The OCF for this lease is composed of the depreciation tax shield cash flow, as well as the aftertax lease payment. Subtracting out the depreciation tax shield cash flow we calculated earlier, we find:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aftertax lease payment = $849,969.49 – 262,500 = $587,469.49 Since this is the aftertax lease payment, we can now calculate the breakeven pretax lease payment as: Breakeven lease payment = $587,469.49/(1 – .35) = $903,799.22 5. We already calculated the breakeven lease payment for the lessor in Problem 3. Since the assumption about the lessor concerning the tax rate have not changed. So, the lessor breaks even with a payment of $903,799.22. For the lessee, we need to calculate the breakeven lease payment which results in a zero NAL. Using the assumptions in Problem 4, we find: NAL = 0 = $3,000,000 – PMT(PVIFA 8%,4 ) PMT = $905,762.41 So, the range of lease payments that would satisfy both the lessee and the lessor are: Total payment range = $903,799.22 to $905,762.41 7. We will calculate cash flows from the depreciation tax shield first. The depreciation tax shield is: Depreciation tax shield = ($350,000/5)(.35) = $24,500 The aftertax cost of the lease payments will be:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

Page1 / 7

ans-odd-problems-ch21 - CHAPTER 21 LEASING Solutions to...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online