Question: A1 Corp. is considering leasing an machine from B2, Inc. Cost of Machine 1,000,000 Depreciation 5-year MACRS method with 0 residual value Lease term (in
| A1 Corp. is considering leasing an machine from B2, Inc. | |||
| Cost of Machine | 1,000,000 | ||
| Depreciation | 5-year MACRS method with 0 residual value | ||
| Lease term (in years) | 6 | ||
| Lease Payment | 200000 | at the beginning of years 0, 1, , 5. | |
| Tax Rate for A1 | 0.0% | A1 has tax-loss which prevents it from additional tax shield | |
| Tax Rate for B2 | 40.0% | ||
| A1 Cost of Borrowing | 10.0% | ||
| B2 Cost of Borrowing | 7.0% |
| |
a. Based on the information given, is it advantageous for both A1 Corp.to lease the machine and for B2 Inc. to purchase the asset in order to lease it out to A1?
b. If the answer in part a is yes, then what is the maximum lease payment which A1 will pay and the minimum rental which B2 will accept?
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