A computer costs $500,000 and is depreciated for tax purposes straight-line over years 1 through 5. Assume that it has zero salvage value at the end of 5 years. The user wishes to lease the computer by making 6 annual lease payments, the first of which is due immediately.
If taxes are paid without delay and the rate of interest is 10%, what is the minimum acceptable lease payment for a lessor who pays tax at 35%? (Approximately)

Question

Quizplus · Accepted Answer

The lessor needs to recover the cost of the computer and earn a return. The annual depreciation is $100,000 ($500,000/5). The after-tax cost recovery is $65,000 ($100,000 * (1 - 0.35)). The present value of these after-tax cost recoveries over 5 years at 10% is approximately $246,000. The lessor also needs to earn a return on the investment. The present value of 6 lease payments at 10% is approximately 4.355. Solving for the lease payment: $500,000 = Lease Payment * 4.355 + $246,000. The lease payment is approximately $105,798.

A Computer Costs $500,000 and Is Depreciated for Tax Purposes