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Dealing with Salvage value.doc

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Administrative Studies
ADMS 3530
Hernan Humana

Dealing with Salvage value Incorporating salvage into the NAL formula is fairly straightforward. If the asset will have salvage value at the end of the lease, the lessee will obviously not get the salvage value (the lessor will). So we need to subtract the (appropriately discounted) foregone salvage value. We also need to remember that salvage changes the PVCCATS calculation. Here is an example. The differences between an NAL problem with no salvage and a problem with salvage are shown in red. 22-8. The Wildcat Oil Company needs to decide whether to buy or lease an asset. The asset costs $6 million and has a 25% CCA rate. The equipment will have a $650,000 salvage value at the end of its 5 year life. Wildcat’s tax rate is 36% and the pre-tax cost of debt is 8.5%. Leasing payments will be $1,350,000 per year. The lease payments are at the beginning of each period, and the CCA pool remains open after the lease is completed. Since the pool remains open, we can use the following formula: NAL = I - PV of after-tax lease payments - PVCCAT
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