Chapter 25, Problem 19PS

Valuing financial leases The Safety Razor Company has a large tax-loss carry-forward and does not expect to pay taxes for another 10 years. The company is therefore proposing to lease $100,000 of new machinery. The lease terms consist of eight equal lease payments prepaid annually. The lessor can write the machinery off over seven years using straight-line depreciation. There is no salvage value at the end of the machinery’s economic life. The tax rate is 30%, and the rate of interest is 10%. Wilbur Occam, the president of Safety Razor, wants to know the maximum lease payment that his company should be willing to make and the minimum payment that the lessor is likely to accept. Can you help him?