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Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,600 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $260 per desk at the beginning of each year. The cost of capital is 11% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $3,600 desk. The company has just issued five-year notes at an interest rate of 8% per year.   What is the break-even rate in this case?

Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,600 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $260 per desk at the beginning of each year. The cost of capital is 11% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $3,600 desk. The company has just issued five-year notes at an interest rate of 8% per year.   What is the break-even rate in this case?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,600 desk. Desks last for six years and can be depreciated immediately. Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $260 per desk at the beginning of each year. The cost of capital is 11% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero. Suppose a blue-chip company requests a six-year financial lease for a $3,600 desk. The company has just issued five-year notes at an interest rate of 8% per year.

 

What is the break-even rate in this case?

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