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Wilayah Leasing & Credit Berhad is arranging for a 6-year lease financing facility for a new boiler costing $5,000,000. Assume the following information:- Equipment falls

Wilayah Leasing & Credit Berhad is arranging for a 6-year lease financing facility for a new boiler costing $5,000,000. Assume the following information:-

  • Equipment falls under the MACRS 5-year class
  • An estimated annual maintenance expense of $150,000 is paid at the end of each year and this cost is expected to increase at a rate of 5% annually from year 4 onwards.
  • Annual insurance premium is calculated at a rate of 1.65% of the insured value. For the first year, the equipment will be insured for $5.0 million. For the subsequent years, the book value of the asset is taken as the yearly insured value. Annual insurance premium are being paid at the beginning of the year.
  • Under the proposed lease terms, the lessor must pay for maintenance and insurance
  • The tentative lease payment calls for a six beginning-of-the-year payments of $650,000
  • Corporate tax is at 35%
  • Wilayah Leasing will invest 75% of its fund to purchase the equipment and finance the remaining cost with a bank loan of 6.75% nominal rate, on yearly rests, payable in 6 years (ordinary annuity)
  • At the end of the lease period, the equipment can be sold for $500,000.

Should Wilayah Leasing proceed with this arrangement to finance its customer?

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