Question
A bank is considering a $3 million leasing program with equal rental payments due at the end of each of the next seven years. Rental
A bank is considering a $3 million leasing program with equal rental payments due at the end of each of the next seven years. Rental payments are $532,000 and the residual value is 18% of the initial asset cost. Depreciation is based on the seven-year class of the MACRS with a shift from 150% declining balance to straight line in the fourth year (table 3-16). The after tax weighted cost of capital is 6.3% and the marginal income tax rate is 32%. What is the net present value of the leasing program? Should the bank implement the leasing program? Explain.
Lessor perspective: Operating lease | |||||||||||
Investment | $3,000,000 | ||||||||||
Lease term, years | 7 | ||||||||||
Rental payment | $532,000 | ||||||||||
Residual payment | 18% | ||||||||||
After-tax cost of capital | 6.3% | ||||||||||
marginal tax rate | 32.0% | ||||||||||
Year | |||||||||||
Initial investment | Rental payments | Depreciation | Remaining value | Residual value | Before-tax net cash flow | Tax | After-tax net cash flow | ||||
0 | |||||||||||
1 | $532,000 | -$321,429 | -$321,429 | $0.1071 | |||||||
2 | $532,000 | -$573,980 | $0.1913 | ||||||||
3 | $532,000 | -$450,984 | $0.1503 | ||||||||
4 | $532,000 | -$367,500 | $0.1225 | ||||||||
5 | $532,000 | -$367,500 | $0.1225 | ||||||||
6 | $532,000 | -$367,500 | $0.1225 | ||||||||
7 | $532,000 | -$367,500 | $0.1225 | ||||||||
8 | $0.0613 | ||||||||||
PV of initial investment | ||||
PV of rental payments | ||||
PV of taxes on rental payments | ||||
PV of after-tax rental payments | ||||
PV of residual | ||||
NPV | ||||
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