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: