18. Valuing financial leases (S26.4) The Safety Razor Company has a large tax-loss carryforward and does not
Question:
18. Valuing financial leases (S26.4) The Safety Razor Company has a large tax-loss carryforward and does not expect to pay taxes for another 10 years. The company is therefore proposing to lease $100,000 of new machinery. The lease terms consist of eight equal lease payments prepaid annually. The lessor can write the machinery off straight line over seven years. There is no salvage value at the end of the machinery’s economic life. The tax rate is 30%, and the rate of interest is 10%. Wilbur Occam, the president of Safety Razor, wants to know the maximum lease payment that his company should be willing to make and the minimum payment that the lessor is likely to accept. Can you help him?
Step by Step Answer:
Principles Of Corporate Finance
ISBN: 9781264080946
14th Edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen, Alex Edmans