PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 25, Problem 18PS
Valuing financial leases Nodhead College needs a new computer. It can either buy it for $250,000 or lease it from Compulease. The lease terms require Nod head to make six annual payments (prepaid) of $62,000. Nod head pays no tax. Compulease pays tax at 30%. Compulease can depreciate the computer for tax purposes straight-line over five years. The computer will have no residual value at the end of year 5. The interest rate is 8%.
- a. What is the NPY of the lease for Nodhead College?
- b. What is the
NPV for Compulease? - c. What is the overall gain from leasing?
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The Bluejay Apartments, a new development, is in the process of structuring its lease agreements. The company would like to set the damage deposits high enough that tenants will keep the apartments in good condition. The company is actually more concerned about damage than about tenants not paying their rent.
a. Indicate the tax effects of the following alternatives:
$1,000 damage deposit with no rent prepayment.
$500 damage deposit and $500 rent for the final month of the lease.
$1,000 rent for the final two months of the lease and no damage deposit.
Question Content Area
b. Which alternative do you recommend to maximize deferrals without affecting cash flows?
Nodhead College needs a new computer. It can either buy it for $250,000 or lease it from Compulease. The lease terms require Nodhead to make 6 annual payments (prepaid) of $58,000. Nodhead pays no tax. Compulease pays tax at 30%. Compulease can depreciate the computer for tax purposes at a CCA rate of 25%, and will close the asset pool at the end of the sixth year. The first CCA tax saving is available in year 0. The computer will have no residual value at the end of year 5. The interest rate is 9%.
a. What is the NPV of the lease for Nodhead College? (Round your answer to the nearest dollar. Use minus sign to enter negative NPV, if any.)
NPV$
b. What is the NPV for Compulease? (Round your answer to the nearest dollar. Use minus sign to enter negative NPV, if any.)
NPV$
c. What is the overall gain from leasing? (Round your answer to the nearest dollar. Use minus sign to enter loss, if any.)
Overall gain (loss)
Hull Manufacturing Co. must decide whether to purchase or lease a new piece of
equipment. The equipment can be leased for $4,000 a year or purchased for $15,000.
The lease includes maintenance and service. The salvage value of the equipment at
the end of five years is $5,000. If the equipment is owned, service and maintenance
charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire
amount at a rate of 15% if they buy. The tax rate is 50%. Which method of financing
would you choose?
Use the following capital cost allowance amounts.
Year
Amount
$4,500
3,150
2,205
1,543
1,081
2
3
4
Chapter 25 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Inflation and operating leases In Problem 7, we...Ch. 25 - Technological change and operating leases Look at...Ch. 25 - Valuing financial leases Look again at Problem 7....Ch. 25 - Valuing Financial Leases Look again at the...
Ch. 25 - Valuing financial leases Look again at the bus...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Valuing financial leases Nodhead College needs a...Ch. 25 - Valuing financial leases The Safety Razor Company...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 23PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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