Question: A bank is considering a $3 million leasing program with equal rental payments due at the end of each of the next seven years. Rental
A bank is considering a $3 million leasing program with equal rental payments due at the end of each of the next seven years. Rental payments are $532,000 and the residual value is 18% of the initial asset cost. Depreciation is based on the seven-year class of the MACRS with a shift from 150% declining balance to straight line in the fourth year (table 3-16). The after tax weighted cost of capital is 6.3% and the marginal income tax rate is 32%. What is the net present value of the leasing program? Should the bank implement the leasing program? Explain.
2. What is the minimum annual lease payment in question 4 that the bank should charge with their leasing program and still remain profitable?
| Lessor perspective: Operating lease | |||||||||
| Investment | $3,000,000 | ||||||||
| Lease term, years | 7 | ||||||||
| Rental payment | $532,000 | ||||||||
| Residual payment | 18% | ||||||||
| After-tax cost of capital | 6.3% | ||||||||
| marginal tax rate | 32.0% | ||||||||
| Year | |||||||||
| Initial investment | Rental payments | Depreciation | Remaining value | Residual value | Before-tax net cash flow | Tax | After-tax net cash flow | ||
| 0 | |||||||||
| 1 | $532,000 | -$321,429 | -$321,429 | ||||||
| 2 | |||||||||
| 3 | |||||||||
| 4 | |||||||||
| 5 | |||||||||
| 6 | |||||||||
| 7 | |||||||||
| 8 | |||||||||
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