Question 3

Part A: Why does the lessor often have higher tax rate than the lessee?

Part B: The Myers Inc. is considering the purchase of a new machine for $36,500. The machine is expected to save the firm $12,800 per year in operating costs over a 5-year period, and can be depreciated on a straight-line basis to a zero salvage value over its life. Alternatively, the firm can lease the machine from Stuart Leasing Company for $6,700 per year for 5 years, with the first payment due in 1 year. The Myers' tax rate is 25% and the before-tax cost of debt is 9%. The tax rate of Stuart Leasing is 36%.

1. Calculate the break-even lease payment for Stuart Leasing. (5 points)