A firm is considering leasing some equipment for 4 years with equal annual lease payments. The equipment would cost $79,000 to buy and would be depreciated straight line over 4 years to a zero salvage value. The applicable pre-tax borrowing rate is 7.9 percent. The lessee does not expect to owe taxes for several years while the lessor's tax rate is 21 percent. What is the minimum lease payment that will be acceptable to both parties?

A lease has five annual payments of $127,000. The leased asset would cost $500,000 to buy, would be depreciated straight line to a zero salvage value over 5 years. The firm can borrow at 8.7 percent on a pretax basis and has a tax rate of 23 percent. What is the net advantage of leasing?

Answer rating: 100% (QA)

SOLUTION 1 To determine the minimum lease payment that would be acceptable to both parties we need to calculate the aftertax cost of leasing and compare it to the cost of buying the equipment The cost ... View the full answer