Question

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%

ABC's interest cost is 10% and XYZ's 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