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ABC Corp. is considering leasing an asset from XYZ Corp. Here are the relevant facts: Asset Cost $1,000,000 Depreciation Schedule Year 1 20% 2 32%

ABC Corp. is considering leasing an asset from XYZ Corp. Here are the relevant facts:

Asset Cost $1,000,000

Depreciation Schedule

Year

1

20%

2

32%

3

19.20%

4

11.52%

5

11.52%

6

5.76%

Lease term 6 years

Lease payment $200,000 per year, from year 1 through 6

Tax rates ABC: Tc = 0% (ABC has a tax-loss carryforwards which prevent it from utilizing any additional tax shields), XYZ: Tc = 40%

ABCs interest cost is 10% and XYZs is 7%.

  • (10 pts) Show that is will be advantageous for ABC to Lease the asset and for XYZ to purchase the equipment and lease it out.
  • (10 pts) Find the maximum ABC will be willing to pay for this lease
  • (10 Pts) Show the minimum XYZ will take for this lease

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