You work as a financial analyst at WPWilly, Inc. You are evaluating how much Acme Limo should charge a client who will lease a car for 7 years. It will cost Acme $75,000 to buy the car and the car can be depreciated on a five-year MACRS schedule. Acme Limos pretax administrative costs including Maintenance, Insurance and Selling Cost are $10,000 per year and they occur at the beginning of each year. The after tax cost of capital is 10% and the tax rate is 25%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero.

a. How much is the depreciation in year 4? _____________ (sample answer:$500.50) b. How much is the depreciation tax shield in year 4? ________________(sample answer:$500.50) c. How much is the present value of after tax administrative costs? _____________(sample answer:$2500.50) d. What is the total present value of Depreciation tax Shield? _____________(sample answer:$2500.50) e. What is the before tax break-even operating lease rate?________________ (sample answer: $2500.50) f. What is the after tax break even operating lease rate? __________________(sample answer: $2500.50)

Depreciation Table for 5-year asset

Year % 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76%