{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

BMGT440hwCh21

# BMGT440hwCh21 - Chapter 21 Leasing 2 3 21.2 7th ed 21.8 8th...

This preview shows pages 1–2. Sign up to view the full content.

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) This lease payment is New Leasing Co’s reservation price.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 3

BMGT440hwCh21 - Chapter 21 Leasing 2 3 21.2 7th ed 21.8 8th...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online