Ajax Capital has determined the amount to be amortized on an extruder is $540,000. If the required rate of return is 14%, what will be the total interest received over the life of the lease given that lease payments will be made at the beginning of each of the 7 years of the lease agreement? Assume a marginal tax rate of 40%.
A) $233,269
B) $748,784
C) $811,080
D) $110,467

Question

Quizplus · Accepted Answer

Using the formula to calculate the lease payment:

PV = Lease Payment x [(1 - (1 + r)-n)/r]

PV = $540,000

r = 14% or 0.14

n = 7

Lease Payment = $135,619.31

Then, to calculate the total interest received, we need to calculate the total lease payments made over the 7-year period and subtract the initial cost of the extruder:

Total lease payments = $135,619.31 × 7 = $949,334.17

Interest received = Total lease payments - PV = $949,334.17 - $540,000 = $409,334.17

Finally, to determine the after-tax interest received, we need to multiply by the marginal tax rate:

After-tax interest received = $409,334.17 × (1 - 0.4) = $245,600.50

Therefore, the closest answer is B ($748,784).

Ajax Capital Has Determined the Amount to Be Amortized on an Extruder