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##### QUESTION 4: Lessor Limited is trying to determine...

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QUESTION 4: Lessor Limited is trying to determine the lease payment it quotes for the excavation equipment. Assume that the equipment costs $2,000,000, has a 4 year useful life and a CCA rate of 50%. Before tax operating cost of the asset is $200,000 per year (paid for by the owner (lessor) of the asset. The corporate tax rate is 40%, before tax cost of debt is 6%, risk free (treasury bill) rate is 4% and cost of capital is 8%. CCA tax shield will be claimed at the end of the year and the lease payment and operating costs will be at the beginning of the year. a. Determine the annual lease payment if the resale value of the asset is $400,000 after 4 years. Assume asset pool is open. b. Determine the lease payment if the depreciation is straight line and the resale value is $400,000 after 4 years. Asset pool is closed, therefore, any gain/loss on disposal will be taxable. c. Continuing with a) above, suppose Lessee Inc. has a corporate tax rate of 0%, cost of debt is 6%, risk free rate is 4% and cost of capital is 10%. What is the maximum lease payment Lessee Inc. would be willing to make? Within what range of values Lessor Limited and Lessee Inc. can make a deal?

Paper#10326 | Written in 18-Jul-2015

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