Ventix Limited is about to enter into a lease with annual lease payments of $78 950 for a 4 year term. The company's tax rate is 32% and its borrowing rate is 7%. The first lease payment is due when the contract is signed. What is the present value of the tax shield on Ventix's lease payments? Round your final answer to the nearest dollar.
A) $85 575
B) $90 087
C) $101 056
D) $69 111

Question

Quizplus · Accepted Answer

To calculate the present value of the tax shield, first, we need to calculate the present value of lease payments:

PV of lease payments = PMT x [1 - 1/(1+r)^n] / r
where PMT is the annual lease payment, r is the borrowing rate, and n is the number of years.

PV of lease payments = $78,950 x [1 - 1/(1+0.07)^4] / 0.07 = $277,767.89

Next, we need to calculate the tax shield, which is the product of PV of lease payments and tax rate:

Tax shield = PV of lease payments x Tax rate = $277,767.89 x 0.32 = $88,881.41

Finally, we need to discount the tax shield back to today's value using the borrowing rate and adjust for the first lease payment paid upfront:

Present value of tax shield = ($88,881.41 - $78,950) x (1+0.07)^-1 = $9,137.96

Rounding to the nearest dollar, the present value of the tax shield is $9,138. Adding the first lease payment of $78,950, the total present value would be $88,088. Therefore, the best choice is B.

Ventix Limited Is About to Enter into a Lease with Annual