--%>
Assignment Help - homework help

Problem on annual lease payments

Taurus Corporation needs a computer, which it can buy for $100,000. Taurus will depreciate the computer uniformly over its useful life of 5 years. An investment tax credit of 7% is also available, and the computer will have no residual value. Taurus plans to borrow the money at an interest rate of 10% specifically to finance the purchase. The tax rate of Taurus is 35%. Gemini Leasing Corporation can also lease the same computer to Taurus for the same period. Calculate the annual lease payments, made in advance each year, and their tax benefit taken right away, that will make Taurus indifferent to leasing or buying.

E

Expert

Verified

If the company has to be indifferent to leasing or buying, the net present value has to be set at zero. Let L be the annual lease payment. The after-tax cost of borrowing is 10% (1 – 0.35) = 6.5%.
Depreciation tax shield lost = (100000/5)*0.35 = $7000
Investment tax credit = 100000*7% = 7000/5 = $1400
Lost credit and shield = 7000 + 1400 = 8400
NPV = 0
100,000 – 0.65L – (0.65L*3.426) – (8400*4.156) = 0
2.8769L = 65089.6
L = $22,624.91

   Related Questions in Corporate Finance

  • Q : Minimum annual savings problem XYZ

    XYZ Company is interested in purchasing a new corporate jet for $6 million. This will depreciate the jet completely in 5 years and then sell it for $5 million. The jet will utilize $60,000 in fuel annually, and its maintenance will be $40,000 yearly. The tax rate of X

    		•
  • Q : How can auditor spot acts of creative

    How can auditor spot acts of creative accounting? Means let an illustration, the excess of provisions or the non-elimination of intra group transactions along with value added.

    		•
  • Q : Problem on Corp stocking Cheever Corp

    Cheever Corp stock is selling at $40 a share. Its dividend in subsequent year will be $2 a share and its β is 1.25. Crane Company has similar growth rate as Cheever. The current stock price of Crane is $55 a share, and its dividend this year is $3. The riskless r

    		•
  • Q : Zero Coupon Bonds-Corporate Bonds

    Describe the term Zero Coupon Bonds in Corporate Bonds?

    		•
  • Q : Probability of dividend Universal

    Universal Corporation has the following dividend policy: if the earnings after taxes are less than $1 million, the dividend payout ratio will be 35%, but if these earnings are over $1 million, the dividend payout ratio will be 45%. The EBIT of Universal for next year

    		•
  • Q : Did you see Vueling case Did you notice

    Did you notice the Vueling case? How is this possible that an investment bank sets the objective price of its shares in €2.50 per share upon the 2nd of October, 2007, just after replacing Vueling shares at €31 per share in J

    		•
  • Q : Problem on price share and stock

    Brittney and Kim Wan Sun have successfully launched a successful talent agency, ABC. They expect the firm’s earnings and dividends to grow by 20% annually for the next 10 years and they establish a strong base and to grow at a constant 5% per year thereafter. AB

    		•
  • Q : Explain undervaluation of share on the

    Suppose we calculate g as ROE (1–p)/(1–ROE (1–p)) and the Ke by the CAPM. We replace both values into the formula PER = (ROE (1+g) – g)/ROE (Ke-g) but there PER we obtain is fully different from the one we get by dividing the quotation of the s

    		•
  • Q : Calculated Free Cash Flow I think Free

    I think Free Cash Flow (FCF) can be acquired from the Equity Cash Flow (CFac) using the relation as: FCF = CFac + Interests – ΔD. Is it true?

    		•
  • Q : Does the book value of the debt

    Does the book value of the debt all the time coincide with its market value?

    		•