Question

There are two parties in any lease contract - Lessee and the lessor. To a lessor, a lease anlysis involves a capital dugeting analysis of the property or equipment to be leased. The lessor's decison is either to purchase and lease-out the asset, or not make the investment at all. Like any capital budeting decision, the lessor needs to evaluate the rate of return expected to be earned from making the lease. Further, since the cost and other terms of leases involving high-cost items are negotiated, this rate of return information is also important information for a prospectiv leassee.

1. Pele Corp. is a professional leasing company. The leasing manager has to evaluate some lease agreements under the following conditions: - The company's marginal federal-plus-state income tax rate is 35%. - The company has alternative investment options of similar risk that yield 8.50% Assuming all other factors and values are constant among these leases, fromt the lessor's perspective, which of the following are the best lease? a. A lease that has an MIRR of 4.73% b. A lease that has an IRR of 6.33% c. A lease that generates an after-tax rate of return of 5.03% d. A lease that hads NPV of -$81,000 2. Based on your understanding of lease contracts, which type of lease cash flow has the most uncertainty? a. Loan payments b. Lease payments c. Tax savings