--%>
Assignment Help - homework help

Problem on annual lease payments

Taurus Corporation needs a computer, which it can buy for $100,000. Taurus will depreciate the computer uniformly over its useful life of 5 years. An investment tax credit of 7% is also available, and the computer will have no residual value. Taurus plans to borrow the money at an interest rate of 10% specifically to finance the purchase. The tax rate of Taurus is 35%. Gemini Leasing Corporation can also lease the same computer to Taurus for the same period. Calculate the annual lease payments, made in advance each year, and their tax benefit taken right away, that will make Taurus indifferent to leasing or buying.

E

Expert

Verified

If the company has to be indifferent to leasing or buying, the net present value has to be set at zero. Let L be the annual lease payment. The after-tax cost of borrowing is 10% (1 – 0.35) = 6.5%.
Depreciation tax shield lost = (100000/5)*0.35 = $7000
Investment tax credit = 100000*7% = 7000/5 = $1400
Lost credit and shield = 7000 + 1400 = 8400
NPV = 0
100,000 – 0.65L – (0.65L*3.426) – (8400*4.156) = 0
2.8769L = 65089.6
L = $22,624.91

   Related Questions in Corporate Finance

  • Q : Which parameter good measures value

    Which parameter good measures value creation; the Economic Value Added (EVA), the CVA (Cash Value Added) or the economic profit?

    		•
  • Q : International financial what can we

    what can we expanded opportinity set of international finance?

    		•
  • Q : Did you see Vueling case Did you notice

    Did you notice the Vueling case? How is this possible that an investment bank sets the objective price of its shares in €2.50 per share upon the 2nd of October, 2007, just after replacing Vueling shares at €31 per share in J

    		•
  • Q : Explain Straddle and Strangle Straddle

    Straddle & Strangle: In the case of shorting butterfly spread, it can be seen that the gains are limited. However, there exists another strategy known as straddle which produces unlimited gains. This strategy benefits when the trader expects that

    		•
  • Q : Minimum pretax earnings XYZ Company is

    XYZ Company is planning to acquire a machine which will cost $200,000, that will last for 4 years. The company employs straight-line depreciation. The tax rate of XYZ is 35% and the proper discount rate in this situation is 12%. (A

    		•
  • Q : Data Case Please assist with the

    Please assist with the attached Data Case assignment

    		•
  • Q : FIN3000 Corporate Finance Task

    Task Description Length: 1000-2000 words (up to 500 words above 2000 permitted) Description: • Complete this assignment in groups of 4-5 students. • Maintain a portfolio of financial issues taken from 8 news sources. • Analyse the articles with reference to theory covered in class and highlig

    		•
  • Q : How could we project exchange rates How

    How could we project exchange rates within order to be capable to forecast exchange differences?

    		•
  • Q : Continuously compounded rate of return

    Solve for the stated annual rate, r equal to the continuously compounded rate of return implicit in turning $1 at the end of 1925 (beginning of 1926) into these reported valued from RWJ9 in 2008 Figure below: 1. Determine the state

    		•
  • Q : Who explained put–call parity Who

    Who explained put–call parity?

    		•