7. Evaluation by the lessor

Both the lessee and the lessor conduct an analysis to evaluate if the potential lease agreement will be mutually beneficial or not.

Suppose you work as a leasing manager at a professional leasing company and youre working on a deal where the equipment to be leased requires an initial outlay of $90,000 with a lease term of four years.

You will be depreciating the equipment on a straight-line basis with an amount of $22,500 per year down to a salvage value of $0. However, the actual salvage value of the equipment is expected to be $18,000 at the end of the lease term. In your analysis youll treati the salvage value as a recapture of the depreciation and tax it at a marginal rate of 35%. Your company expects an after-tax rate of return of 9% in all deal evaluations.

As a leasing manager you would conduct a three-step process in your analysis. Complete the different elements involved in the analysis.

Step 1: Calculate the amount to be amortized in the deal.

Note: Round your Present value answers to two decimals places and amortized amount to whole number.

Amortization Amount Calculations
Initial Outlay	$90,000
Less: Present value of after-tax salvage
Less: Present value of depreciation tax shelter
Amount to be amortized

Step 2: Calculate the after-tax lease income requirement considering that lease payments are made in the beginning of the year.

The annual after-tax lease income to the lessor is .

Step 3: Calculate before-tax lease payment to be made by the lessee.

The lease payment required from the lessee is .