Contech (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the asset on a straight-line basis to a salvage value of $0. Actual salvage value is expected to be $8,000 at the end of 4 years. If Wrenn requires a 12% after-tax return on the lease, what is the lease payment that Wrenn will require from Contech? Assume a marginal tax rate of 40%. Under the terms of the lease, payments will be made at the beginning of each of the 4 years.

Question

Quizplus · Accepted Answer

The lease payment is calculated by considering the depreciation tax shield, the required after-tax return, and the timing of the payments. The depreciation tax shield is calculated using the straight-line depreciation method, and the lease payments are adjusted for the 12% after-tax return requirement and the 40% tax rate.

Contech (Lessee) Wishes to Lease a Printing Press Valued at $60,000