Unilog is considering leasing a computer from UniNet under a 6-year lease. The computer costs $200,000 and will be depreciated as a 5-year MACRS asset. The expected salvage value of the computer after 6 years is $20,000. UniNet's marginal tax rate is 35% and its average tax rate is 30%. UniNet requires a 13% after-tax rate of return on leases of this type. What annual, pretax, beginning-of-the-year lease payment must Unilog make to UniNet? (Problem requires MACRS depreciation tables.)
A) $48,786
B) $31,711
C) $50,500
D) $16,848

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation of the asset using the MACRS depreciation tables:

Year 1: 20% depreciation = $40,000
Year 2: 32% depreciation = $64,000
Year 3: 19.20% depreciation = $38,400
Year 4: 11.52% depreciation = $23,040
Year 5: 11.52% depreciation = $23,040
Year 6: 5.76% depreciation = $11,520
Total depreciation = $200,000

Next, we need to calculate the pretax lease payment using the following formula:

PMT = (PV + Depreciation - Salvage Value) x (r / (1 - (1 + r)^-n))

Where:
PV = Present value of the asset = $200,000
Depreciation = Total depreciation over the lease term = $200,000
Salvage Value = Expected salvage value after 6 years = $20,000
r = After-tax rate of return = 13% x (1 - 0.35) = 8.45%
n = Number of lease payments = 6

PMT = ($200,000 + $200,000 - $20,000) x (0.0845 / (1 - (1 + 0.0845)^-6)) = $48,786

Therefore, Unilog must make an annual, pretax, beginning-of-the-year lease payment of $48,786 to UniNet. The correct answer is A.

Unilog Is Considering Leasing a Computer from UniNet Under a 6-Year