An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The corporate tax rate is 32 percent, and the cost of borrowing is 8 percent. What lease payment amount will make the lessee and the lessor equally well off?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Question 1

An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The corporate tax rate is 32 percent, and the cost of borrowing is 8 percent. What lease payment amount will make the lessee and the lessor equally well off?

Question 2 

Steven's Auto Detailers is trying to decide whether to lease or buy some new equipment for polishing vehicles. The equipment costs $22,000, has a 3-year life, and will be worthless after the 3 years. The aftertax discount rate is 6.2 percent. The annual depreciation tax shield is $1,760 and the aftertax annual lease payment is $6,800. What is the net advantage to leasing?

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