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Rehtaeh Inc. (lessee) needs a new photocopier. It can either buy it for $12,000 or lease it from Seeknom (lessor). The lease requires Rehtaeh to
Rehtaeh Inc. (lessee) needs a new photocopier. It can either buy it for $12,000 or lease it from Seeknom (lessor). The lease requires Rehtaeh to make four annual (end-of-year) payments starting in t=1. Retaeh's marginal tax rate is 10%. Seeknom pays taxes at a rate of 50%. No matter who buys the copier, the photocopier is to be depreciated straight-line to zero over the next four years. At the end of year 4, the photocopier would have no residual value for Retaeh if they were to buy it. However, given their advantageous position in the market for photocopiers, Seeknom figures that it will be able to resell it for $1,200 at the end of year 4. The interest rate is 10%, and both Retaeh and Seeknom borrow at that rate. Assume that a purchase can be financed with 100% debt and that the first lease payment occurs one year from now. Even if you cannot completely solve this problem, make sure to set it up so you can get partial credit. What is the maximum lease payment that makes leasing more advantageous (relative to buying) for Retaeh? What is the minimum lease payment that Seeknom is willing to charge? Is
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