lessee will not realize the depreciation tax shield, and the aftertax cost of debt will be the same as the pretaxcost of debt. So, the lesseeâs maximum lease payment will be:NAL = 0 = â$330,000 + PMT3%9APMT = $130,368.07

Answers to EndâofâChapter Problems22-6Both parties have positive NAL for lease payments between $130,180.63 and $130,368.07.22.13The APR of the loan is the lease factor times 2,400, so:APR = 0.00342(2,400) = 0.0821 or 8.21%To calculate the lease payment we first need the net capitalization cost, which is the base capitalized cost plus anyother costs, minus any down payment or rebates. So, the net capitalized cost is:Net capitalized cost = $28,000 + 450 â 2,000Net capitalized cost = $26,450The yearly depreciation charge is :YearUCC -OpeningCCAUCC-Closing126,450529021,160221,1608,46412,696312,6965,0787,618Next, we can calculate the yearly finance charge, which is the net capitalized cost plus the residual value, times thelease factor, or:Finance charge = ($26,450 + 16,500)(0.0821)Finance charge = $3,526.20And the taxes on yearly basis will be:Taxes = ($3,526.20 + 5,290)(0.07)Taxes = $617.13The monthly lease payment for year1, is the sum of the depreciation charge, the finance charge, and taxes, dividedby twelve months:Lease payment = ($5,290 + 3,526.20 + 617.13)/12Lease payment = $786.1122.14With a four-year loan, the annual loan payment will be$4,500,000 = PMT4%8APMT = $1,358,643.62The aftertax loan payment is found by:Aftertax payment = Pretax payment â Interest tax shieldSo, we need to find the interest tax shield. To find this, we need a loan amortization table since the interest paymenteach year is the beginning balance times the loan interest rate of 8 percent. The interest tax shield is the interestpayment times the tax rate. The amortization table for this loan is:So, the total cash flows each year are:

Answers to EndâofâChapter Problems22-7YearBeginningbalanceTotal paymentInterestpaymentPrincipalpaymentEndingbalance1$4,500,000.00$1,358,643.62$360,000.00$998,643.62 $3,501,356.3823,501,356.381,358,643.62280,108.511,078,535.112,422,821.2732,422,821.271,358,643.62193,825.701,164,817.921,258,003.3541,258,003.351,358,643.62100,640.271,258,003.350Aftertax loan paymentOCFTotal cash flowYear 1: $1,358,643 â ($360,000)(0.35)= $1,232,643.62 â1,271,250=â$38,606.38Year 2: $1,358,643 â ($280,108.51)(0.35)= $1,260,605.64 â1,271,250=â10,644.36Year 3: $1,358,643 â ($193,825.70)(0.35)= $1,290,804.62 â1,271,250=19,554.62Year 4: $1,358,643 â ($100,640.27)(0.35)= $1,323,419.53 â1,271,250=52,169.53So, the NAL with the loan payments is:NAL = 0 â $38,606.38/1.052 â $10,644.36/1.0522+ $19,554.62/1.0523+ $52,169.53/1.0524NAL = $13,074.25The NAL is the same because the present value of the aftertax loan payments, discounted at the aftertax cost ofcapital (which is the aftertax cost of debt) equals $4,500,000.22.15a.The decision to buy or lease is made by looking at the incremental cash flows, so we need to find the cashflows for each alternative. The cash flows if the company leases are:Cash flows from leasing:Aftertax cost savings = $12,000(1 â 0.34)Aftertax cost savings = $7,920The tax benefit of the lease is the lease payment times the tax rate, so the tax benefit of the lease is:Lease tax benefit = $27,000(0.34)Lease tax benefit = $9,180We need to remember the lease payments are due at the beginning of the year. So, if the company leases, thecash flows each year will be:Year 0Year 1Year 2Year 3Year 4Year 5Aftertax savings$7,920$7,920$7,920$7,920$7,920Lease paymentâ$27,000â$27,000â$27,000â$27,000â$27,000Tax benefit9,1809,1809,1809,1809,180Net cash flowsâ$17,820â$9,900â$9,900â$9,900â$9,900$7,920

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