ECN 104 : Leasing problems 22.2-22.7.doc

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Fin401 solutions to questions 2-7 in chapter 22 (editions 5 and 6) Note: assume that all cash flows other than initial cost occur at the end of a period, unless otherwise stated. Information: initial cost (ic) = . 5m, before tax lease payment (btlp) = k, number of years = n=4, before tax discount rate = . 075, tax rate = . 37, after tax lease payment (atlpa) = (800*(1-. 37)) = k, after tax discount rate (atdr) = (. 075*(1-. 37)) = . 04725, cca rate = . The pv(atlp) is based on n=4, pmt=,000, and r=. 04725, pv(atlp) = 1,798,635. Nal = . 5m -,798,635 - ,108 = -,743. So, given a pv(atlp)=,718,892, r=. 04725, and n= 4, the pmt will be ,655. The pv(atlp) is based on n=4, pmt= btlp*(1-t) = k*(1-0) = k, and r= btdr(1-t) = . In question 4, we determined that the lessor would be indifferent if it received ,532 per year, but no less.