Question 7

A company is considering a proposal to lease out a mining equipment. The equipment can be purchased for K500,000 and, in turn, be leased out at K125,000 per year for 8 years with payments occurring at the end of each year.

i. Estimate the internal rate of return for the company assuming tax is ignored.

ii. What should be the yearly lease payment charge by the company in order to earn 20% annual compounded rate of return before expenses and tax?

iii. Calculate the annual lease rent to be charged to amount to 20% after tax annual compound rate of return, based on the following assumptions: a) Tax rate is 40% b) Straight line depreciation c) Annual expenses of K50,000 d) Salvage value of K100,000