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BMGT440Practicehwch21

# BMGT440Practicehwch21 - BMGT440 Practice Problems Chapter...

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BMGT440 Practice Problems Chapter 21 – Leasing 1 BMGT440 Practice Problems Chapter 21 – Leasing Supplemental Problems Problem 21.1 A non-cancelable lease contract lasts for 4 years with payments of \$37,000 at the end of each year. The lessee pays maintenance expense under either the lease or purchase alternatives. If purchased, the \$100,000 asset will be depreciated under the MACRS 3-year class life schedule (33.34%, 44.44%, 14.81% and 7.41%). The before-tax cost of debt is 12% and the corporate tax rate is 34%. What is the value of the lease to the lessee? Solution 21.1 Cash flows from the lessee's perspective: Year 0 Year 1 Year 2 Year 3 Year 4 Lease –24,420 –24,420 –24,420 –24,420 Cost of machine –\$ 100,000 Depreciation Tax Shield 11,336 15,110 5,035 2,519 Net Lessee CF \$ 100,000 –35,756 –39,530 –29,455 –26,939 After-tax cost of debt = 12% (1 – .34) = 7.92% NPV = –\$10,367 Problem 21.2 If the lease in problem 21.1 were cancelable, how much must the cancellation option be worth to make the lease alternative better than the purchase alternative? Solution 21.2 The lease alternative is more attractive to the lessee when the cancellation option is worth more than \$10,367 to the lessee. Practice Problem 21.3 – based on text problems 1-5 in the 8 th edition of the text. Use the following information to work problems 1-5. You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment.) The scanner cost \$3,000,000.00, and it would be depreciated using the straight-line method to zero over four years. Because of radiation contamination it actually will be completely valueless in four years. You can lease it for \$895,000.00 per year for four years.

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BMGT440Practicehwch21 - BMGT440 Practice Problems Chapter...

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