Lancit Media Productions wishes to lease a high-speed printer that costs $400,000 for a period of 4 years. The leasing company, GKN Leasing, expects to depreciate the entire value of the printer on a straight-line basis over the 4-year period. Actual salvage value is expected to be $50,000. If GKN requires a 12% after-tax rate of return on the lease, what annual lease payments will GKN require? Assume GKN's marginal tax rate is 35% and that all lease payments occur at the beginning of each year.
A) $80,270
B) $123,493
C) $138,312
D) $36,172

Question

Quizplus · Accepted Answer

To calculate the annual lease payment, we need to find the present value of the lease payments that equal the cost of the printer plus any salvage value, using the given after-tax rate of return.

The cost of the printer is $400,000 and the salvage value is $50,000, so the total amount to be financed is $350,000. We can use the formula for the present value of an annuity to find the annual lease payment:

PV = PMT x [(1 - 1/(1+r)^n) / r]
Where:
PV = present value
PMT = lease payment
r = after-tax rate of return
n = number of periods (in this case, 4)

Substituting the given values, we get:
$350,000 = PMT x [(1 - 1/(1+0.12(1-0.35))^4) / 0.12(1-0.35)]
Solving for PMT, we get:
PMT = $123,492.82

Therefore, the annual lease payments will be $123,493 (rounded to the nearest dollar). The answer is B.

Lancit Media Productions Wishes to Lease a High-Speed Printer That