Thornby Consolidated wants to lease new office furniture from West Coast Leasing. The cost of thefurniture is $100 000 and it has an expected life of 6 years, which is also the term of the financiallease. West Coast's cost of capital is 5% and its tax rate is 45%. The combined Present Value of the tax shield from CCA, the salvage and the tax shield lost due to salvage is $39 919. What is the minimum annual lease payment West Coast Leasing can set and earn its required rate of return?

Question

Quizplus · Accepted Answer

To find the minimum annual lease payment, we need to use the formula:
Minimum lease payment = (PV of the tax shield + Cost of the asset)/(PV factor of an annuity due of $1 at 5% for 6 years)

PV factor of an annuity due of $1 at 5% for 6 years = 4.21236

PV of the tax shield is given as $39,919

Cost of the asset is $100,000

Minimum lease payment = (39,919 + 100,000)/(4.21236) = $19,728

Therefore, the minimum annual lease payment West Coast Leasing can set and earn its required rate of return is $19,728. Option B is the correct answer.

Thornby Consolidated Wants to Lease New Office Furniture from West