Net Advantage from Leasing This question has seven parts. Terra Enterprises is trying to determine whether leasing
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Net Advantage from Leasing
This question has seven parts.
Terra Enterprises is trying to determine whether leasing would be a better alternative than purchasing $2.5 million of new equipment.
The equipment has a six-year life after which it can be sold for $75,000. The equipment belongs in a 30% CCA class and can be leased for $500,000 per year, payable at the beginning of each year. The firm can borrow money at 8% and has a 38% tax rate.
- What is the after-tax cost of debt for the lessee?
- What is the amount of the annual after-tax lease payment to the lessee?
- What is the present value of the CCA tax shield?
- What is the present value of the after-tax lease payments?
- What is the net advantage to leasing amount from the perspective of the lessee?
- What is the net advantage from leasing from the lessor's point of view, assuming that the lessor's marginal tax rate is 38%?
- What amount would the lease payment have to be for both the lessor and the lessee to be indifferent to the lease?
Related Book For
Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
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