Problem 3.

Please note this is from the point of view of the lessor, the owner, not the renter.

What is the minimum lease payment that would make purchasing a precision manufacturing machine and writing a 4-year lease contract on it? The price of the machine is $175,000, it is a three-year asset for depreciation purposes, it has a residual value of $7,000, it requires $500 maintenance per year, the cost of capital is 10%, and the corporate tax rate is 40%.

Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.