Moss Limited, a company specializing in executive jets, would like to determine the lease payment it quotes to the lessees. Assume that the plane costs $10,000,000, has 5 year useful life and a CCA rate of 30%. It is assumed that after 5 years resale value would be $1,000,000 with 30% probability, $2,000,000 with 50% probability and $3,000,000 with 20% probability. Before tax operating cost will be $1,000,000 per year. The corporate tax rate is 40%, before tax cost of debt is 8%, treasury bills are offering 3% before tax rate of return, and the cost of capital is 12%. CCA tax shield will be claimed at the end of the year, the lease payment will be at the beginning of the year, and operating cost will be incurred at the end of the year.

a. Determine the annual lease payment for a 5 year lease. Assume asset pool is open.

b. Determine the annual lease payment on a 5 year lease if the asset pool is closed (any gain/loss on disposal will be taxable).

c. Suppose Lenny Airways would like to lease the above plane. Lenny Airways corporate tax rate is 10%. It's before tax cost of debt is 9%, and cost of capital is 15%. Determine the maximum lease payment Lenny Airways would be willing to make. Assume asset pool is open.

d. Within what range of values Moss Limited and Lenny Airways can make a deal? Assume asset pool is open.

Answer rating: 100% (QA)

To calculate the annual lease payment for a 5year lease we need to consider the following steps Step 1 Calculate the CCA Capital Cost Allowance tax sh... View the full answer