Question
The ABC Leasing Company has the opportunity to write a 5-year lease for equipment that costs $260,000. Depreciation would follow the MACRS 3-year schedule (0.33,
The ABC Leasing Company has the opportunity to write a 5-year lease for equipment that costs $260,000. Depreciation would follow the MACRS 3-year schedule (0.33, 0.45, 0.15, and 0.07). The 5 ease payments would be due at the beginning of the year. ABC's borrowing rate is 10% while its tax rate is 25%. At the end of the lease, ABC expects that the market value of the equipment will be zero. ABC is considering writing the lease with $64,000 payments.
What is the present value of the depreciation tax shields that ABC will take if it purchases the equipment?
a.ABC cannot depreciate the asset because it is a leasing company.
b. 56,520.
c.169,560.
d. -56,520.
e.-203,480.
What is the net cost of the equipment to ABC?
a.56,520.
b.169,560.
c.-56,520.
d.-203,480.
e. -260,000.
What is the present value of the after-tax lease payments?
a.320,000.
b.260,000.
c.240,000.
d.208,768.
e.192,322.
What is the NPV of the lease?
a.60,000.
b.36,520.
c.31,232.
d.23.287.
e.5,288.
What is the minimum payment that ABC should be willing to accept?
a.65,288.
b.62,379.
c.58,488.
d.46,784.
e.38,355.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started