BMGT440hwCh21

BMGT440hwCh21 - Chapter 21 Leasing 2, 3 21.2 7th ed., 21.8...

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Chapter 21 – Leasing 2, 3 21.2 7 th ed., 21.8 8 th ed. The reservation payment is found by setting the NPV of the lease to $0, and then solving for the lease payment. a. For Quartz Corp, the lessee: Since Quartz's effective tax rate is 0, the after tax discount rate is 8%. (The after-tax cost of debt = the pre-tax cost of debt.) Also, with no taxes, there is no depreciation tax shield foregone. To find the most that the lessee would pay, we Set the NPV = 0, and solve for the payment (L): NPV (lease) = Cost - after tax PV(lease payments) ( 5 08 . 0 Α ) is found using financial calculator with PMT = 1, N = 5, I = 8, FV = 0, => PV = 3.99271 0 = $250,000 - L ( 5 08 . 0 Α ) = $250,000 - L (3.99271) L = $62,614.11 The lease payment is Quartz’s reservation price. i.e. for L > 62,614.11, Quartz will have NPV<0. b. For New Leasing, the lessor: NPV = Cost + after tax PV(Lease payments) + PV(Depreciation tax shield) Depreciation = $250,000 / 5 = $50,000 per annum Depreciation tax shield = $50,000 × 0.35 = $17,500 After-tax discount rate = 0.08 (1 - 0.35) = 0.052 As in part a., set NPV = 0, and solve for L: NPV (lease) = 0 = -$250,000 + L (1 - 0.35) 5 052 . 0 Α + $17,500 5 052 . 0 Α PMT = .65, N = 5, I = 5.2, FV = 0 => PV = 2.798669 PMT = 17,500, N = 5, I = 5.2, FV = 0 => PV = 75,348.785957 NPV = 0 = -$250,000 + 2.7987L + $75,348.79 => 2.7987L = 174,651.214 L = $62,405.09 (if hold all decimal places) or $62,420.01 (if rounded)
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This note was uploaded on 02/22/2011 for the course BMGT 440 taught by Professor White during the Spring '08 term at Maryland.

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BMGT440hwCh21 - Chapter 21 Leasing 2, 3 21.2 7th ed., 21.8...

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