Question
The firm wants to lease a $500,000 piece of equipment. The equipment has a 5-year life and a salvage value of $100,000 at the end
The firm wants to lease a $500,000 piece of equipment. The equipment has a 5-year life and a salvage value of $100,000 at the end of year 5. Depreciation is straight-line over 5 years to a zero-book value. There will be 5 pre-paid lease payments on the equipment. Purchasing the asset has a positive NPV for the firm. Assume the tax rate is 25%. The before-tax cost of debt is 3%.
a.What is the maximum before-tax payment the firm is willing to make?
b.Aside from changing the lease payment, what is one factor that will make leasing more attractive to the firm?
c.If the leased equipment is in good condition upon its return, the firm will get a refund of $20,000 at the end of year 5. Assume the bonus will be taxed. Does this change the answer? If so, how? A verbal and numeric solution is needed.
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