The Benton Company has decided to acquire some new R&D equipment. One alternative is to lease...

 

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The Benton Company has decided to acquire some new R&D equipment. One alternative is to lease the equipment on a 4-year guideline contract for a lease payment of $11,500 per year, payments to be made at the beginning of each year. The lease, which would include maintenance, is being offered by lePage Credit Corporation, a local leasing company. LePage would purchase the equipment outright for $40,000, and would have to pay the local dealer $1,000 at the beginning of each year to provide maintenance service. The equipment falls into the MACRS 3-year class, and it has a residual value of $10,000, which is the expected market value after 4 years. The lessor's marginal state-plus-federal tax rate is 40 percent. The analysts at LePage compare the returns on potential leases with returns available on comparable maturity commercial bank loans which the firm also writes. Currently, LePage is charging 9 percent on 4- year commercial loans. Based on the NPV analysis, Should LePage write the lease? Why or why not? The Benton Company has decided to acquire some new R&D equipment. One alternative is to lease the equipment on a 4-year guideline contract for a lease payment of $11,500 per year, payments to be made at the beginning of each year. The lease, which would include maintenance, is being offered by lePage Credit Corporation, a local leasing company. LePage would purchase the equipment outright for $40,000, and would have to pay the local dealer $1,000 at the beginning of each year to provide maintenance service. The equipment falls into the MACRS 3-year class, and it has a residual value of $10,000, which is the expected market value after 4 years. The lessor's marginal state-plus-federal tax rate is 40 percent. The analysts at LePage compare the returns on potential leases with returns available on comparable maturity commercial bank loans which the firm also writes. Currently, LePage is charging 9 percent on 4- year commercial loans. Based on the NPV analysis, Should LePage write the lease? Why or why not?

Answer rating: 100% (QA)

To determine whether LePage should write the lease we can perform a net present value NPV analysis The NPV analysis compares the present value of cash ... View the full answer