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 percent after-tax rate of return on the lease, what is the lessor's amount to be amortized? Assume Wrenn's marginal tax rate is 40%.
A)$60,000
B)$38,725
C)$41,778
D)$36,690

Question

Quizplus · Accepted Answer

Initial outlay $60,000
Less: PV of salvage value $8,000(0.636)(0.60) -3,053
Less: PV of dep. tax shield $15,000(3.037)(0.40) -18,222
Amount to be amortized $38,725

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