ABC Corp. is considering leasing an asset from XYZ Corp. Here are the relevant facts: Asset Cost
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Question:
ABC Corp. is considering leasing an asset from XYZ Corp. Here are the relevant facts:
Asset Cost $1,000,000
Depreciation Schedule
Year
1
20%
2
32%
3
19.20%
4
11.52%
5
11.52%
6
5.76%
Lease term - 6 years
Lease payment $200,000 per year, from year 1 through 6
Tax rates - ABC: Tc = 0% (ABC has a tax-loss carryforwards which prevent it from utilizing any additional tax shields), XYZ: Tc = 40%
ABC's interest cost is 10% and XYZ's is 7%.
- (10 pts) Show that is will be advantageous for ABC to Lease the asset and for XYZ to purchase the equipment and lease it out.
- (10 pts) Find the maximum ABC will be willing to pay for this lease
- (10 Pts) Show the minimum XYZ will take for this lease
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