A bus company is considering acquisition of a bus for $100,000. The life of the bus is seven years. Then, it will be dispatched to the scrap yard. The bus manufacturer points out that the bus is available on lease as well for eight annual payments of $18,951 each with the first payment due immediately. The bus company would bear the costs of maintenance, insurance and operating. The marginal tax rate for the bus company and the manufacturer is 35%. The bus will be subject to MACRS schedule. The borrowing rate for the bus company and the manufacturer is 10%.
Calculate the minimum lease payment that would satisfy the lessor and calculate the NPV. (Hint: The lessor would be charge a lease payment to the lessee such that the lessor would be at the indifference point.)
1. A lessor tax rate of 50% (instead of 35%).
2. Immediate 100% depreciation in year 0 (instead of MACRS).
3. A three-year lease with four annual payments (instead of seven-year lease with eight annual payments) with MACRS.
4. An interest rate of 20% (instead of 10%).