Magnum Leasing is in the business of providing automobiles on wet lease to corporate clients. Magnum...

 

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Magnum Leasing is in the business of providing automobiles on wet lease to corporate clients. Magnum is considering a new model of Ford car for which an enquiry has come. The cost of the vehicle is 1.5 million. Its operating, maintenance, and insurance costs are expected to be 0.25 million in year 1; thereafter it will increase annually by 6 percent. The vehicle is expected to have a useful life of 6 years and it will fetch a net salvage value of 0.6 million after that. The depreciation rate for tax purposes will be 40 percent under the WDV method. Magnum's marginal tax rate is 35 percent and its cost of capital is 10 percent. What is the minimum annual lease rental that Magnum should quote? Ignore the cost of ne- gotiation and lease administration. Magnum Leasing is in the business of providing automobiles on wet lease to corporate clients. Magnum is considering a new model of Ford car for which an enquiry has come. The cost of the vehicle is 1.5 million. Its operating, maintenance, and insurance costs are expected to be 0.25 million in year 1; thereafter it will increase annually by 6 percent. The vehicle is expected to have a useful life of 6 years and it will fetch a net salvage value of 0.6 million after that. The depreciation rate for tax purposes will be 40 percent under the WDV method. Magnum's marginal tax rate is 35 percent and its cost of capital is 10 percent. What is the minimum annual lease rental that Magnum should quote? Ignore the cost of ne- gotiation and lease administration.

Answer rating: 100% (QA)

Q1 operating and other costs at the end of 6th year 033 Q2 value of posttax EAC 038 Millions Q3 Pres... View the full answer