Question 1 Ford Motor has decided to buy a new equipment that costs $ 3,200,000 The equipment will be depreciated on a straight line basis down to zero The corporate tax rate is 35 and Ford Motor can borrow at 9 Toyota Leasing Corp is willing to lease the same equipment to Ford Motor for the lease payments of $ 0 95 million per year are due at the beginning of each of the four years of the lease Should Ford Motor lease the equipment or buy it outright What is the annual lease payment that will make Ford Motor indifferent to whether it leases the equipment or buys it Question 2 A machine costs $650,000 and will be depreciated in a straight line manner over its 3 year life It will have no salvage value The lessor can borrow at 7 and the lessee can borrow at 9 The corporate tax rate is 34 for both companies How does the fact that the lessor and lessee have different borrowing rates affect the calculation of the NAL What set of lease payments will make the lessee and the lessor equally well off Assume that the lessee pays no taxes and the lessor is in the 34 tax bracket For what range of lease payments does the lease have a positive NPV for both parties

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Question 1 Ford Motor has decided to buy a new equipment that costs $ 3,200,000. The equipment will be depreciated on a straight-line basis down

Question 1

Ford Motor has decided to buy a new equipment that costs $ 3,200,000. The equipment will be depreciated on a straight-line basis down to zero. The corporate tax rate is 35% and Ford Motor can borrow at 9%. Toyota Leasing Corp. is willing to lease the same equipment to Ford Motor for the lease payments of $ 0.95 million per year are due at the beginning of each of the four years of the lease.

Should Ford Motor lease the equipment or buy it outright?
What is the annual lease payment that will make Ford Motor indifferent to whether it leases the equipment or buys it?

Question 2

A machine costs $650,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The lessor can borrow at 7% and the lessee can borrow at 9%. The corporate tax rate is 34% for both companies.

How does the fact that the lessor and lessee have different borrowing rates affect the calculation of the NAL?
What set of lease payments will make the lessee and the lessor equally well off?
Assume that the lessee pays no taxes and the lessor is in the 34% tax bracket. For what range of lease payments does the lease have a positive NPV for both parties?