An asset costs $620,000 and will be depreciated in a straight-line manner over its three-year life. It

Question:

An asset costs $620,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 7 percent and the lessee can borrow at 9 percent. The corporate tax rate is 34 percent for both companies.

a. How does the fact that the lessor and lessee have different borrowing rates affect the calculation of the NAL?

b. What set of lease payments will make the lessee and the lessor equally well off?

c. Assume that the lessee pays no taxes and the lessor is in the 34 percent tax bracket. For what range of lease payments does the lease have a positive NPV for both parties?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...