The First National Bank of Springer has established a leasing subsidiary. A local firm, Allied Business Machines,

Question:

The First National Bank of Springer has established a leasing subsidiary. A local firm, Allied Business Machines, has approached the bank to arrange lease financing for $10 million in new machinery. The economic life of the machinery is estimated to be 20 years. The estimated at the end of the 20-year period is $0. Allied Business Machines has indicated a willingness to pay the bank $1 million per year at the end of each year for 20 years under the terms of a financial lease.
a. If the bank depreciates the machinery on a straight-line basis over 20 years to a $0 estimated and has a 40 percent marginal tax rate, what after-tax rate of return will the bank earn on the lease?
b. In general, what effect would the use of MACRS depreciation by the bank have on the rate of return it earns from the lease?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...