Lessee will not realize the depreciation tax shield

lessee will not realize the depreciation tax shield, and the aftertax cost of debt will be the same as the pretax
cost of debt. So, the lessee’s maximum lease payment will be:
NAL = 0 = –$330,000 + PMT
3
% 9
A
PMT = $130,368.07

Answers to End–of–Chapter Problems 22-6
Both parties have positive NAL for lease payments between $130,180.63 and $130,368.07.
22.13 The 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 any
other costs, minus any down payment or rebates. So, the net capitalized cost is:
Net capitalized cost = $28,000 + 450 – 2,000
Net capitalized cost = $26,450
The yearly depreciation charge is :
Year UCC -
Opening
CCA UCC-
Closing
1 26,450 5290 21,160
2 21,160 8,464 12,696
3 12,696 5,078 7,618
Next, we can calculate the yearly finance charge, which is the net capitalized cost plus the residual value, times the
lease factor, or:
Finance charge = ($26,450 + 16,500)(0.0821)
Finance charge = $3,526.20
And the taxes on yearly basis will be:
Taxes = ($3,526.20 + 5,290)(0.07)
Taxes = $617.13
The monthly lease payment for year1, is the sum of the depreciation charge, the finance charge, and taxes, divided
by twelve months:
Lease payment = ($5,290 + 3,526.20 + 617.13)/12
Lease payment = $786.11
22.14 With a four-year loan, the annual loan payment will be
$4,500,000 = PMT
4
% 8
A
PMT = $1,358,643.62
The aftertax loan payment is found by:
Aftertax payment = Pretax payment – Interest tax shield
So, we need to find the interest tax shield. To find this, we need a loan amortization table since the interest payment
each year is the beginning balance times the loan interest rate of 8 percent. The interest tax shield is the interest
payment times the tax rate. The amortization table for this loan is:
So, the total cash flows each year are:

Answers to End–of–Chapter Problems 22-7
Year
Beginning
balance Total payment
Interest
payment
Principal
payment
Ending
balance
1 $4,500,000.00 $1,358,643.62 $360,000.00 $998,643.62 $3,501,356.38
2 3,501,356.38 1,358,643.62 280,108.51 1,078,535.11 2,422,821.27
3 2,422,821.27 1,358,643.62 193,825.70 1,164,817.92 1,258,003.35
4 1,258,003.35 1,358,643.62 100,640.27 1,258,003.35 0
Aftertax loan payment OCF Total cash flow
Year 1: $1,358,643 – ($360,000)(0.35) = $1,232,643.62 – 1,271,250 = –$38,606.38
Year 2: $1,358,643 – ($280,108.51)(0.35) = $1,260,605.64 – 1,271,250 = –10,644.36
Year 3: $1,358,643 – ($193,825.70)(0.35) = $1,290,804.62 – 1,271,250 = 19,554.62
Year 4: $1,358,643 – ($100,640.27)(0.35) = $1,323,419.53 – 1,271,250 = 52,169.53
So, the NAL with the loan payments is:
NAL = 0 – $38,606.38/1.052 – $10,644.36/1.052
2
+ $19,554.62/1.052
3
+ $52,169.53/1.052
4
NAL = $13,074.25
The NAL is the same because the present value of the aftertax loan payments, discounted at the aftertax cost of
capital (which is the aftertax cost of debt) equals $4,500,000.
22.15 a. The decision to buy or lease is made by looking at the incremental cash flows, so we need to find the cash
flows for each alternative. The cash flows if the company leases are:
Cash flows from leasing:
Aftertax cost savings = $12,000(1 – 0.34)
Aftertax cost savings = $7,920
The 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 = $9,180
We need to remember the lease payments are due at the beginning of the year. So, if the company leases, the
cash flows each year will be:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Aftertax savings $7,920 $7,920 $7,920 $7,920 $7,920
Lease payment –$27,000 –$27,000 –$27,000 –$27,000 –$27,000
Tax benefit 9,180 9,180 9,180 9,180 9,180
Net cash flows –$17,820 –$9,900 –$9,900 –$9,900 –$9,900 $7,920