Daymark (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 press using 3-year MARCS depreciation rates. Actual salvage value is expected to be $8,000 at the end of 4 years. Under terms of the lease, payments will be made at the beginning of each of the 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lease payment that Wrenn will require from Daymark? Assume a marginal tax rate of 40%.

Question

Quizplus · Accepted Answer

To calculate the lease payment that Wrenn will require from Daymark, we need to consider the after-tax cost of the lease to Wrenn, including the depreciation tax shield and the salvage value, and then find the lease payment that provides Wrenn with a 12% after-tax rate of return. The calculation involves determining the present value of the lease payments, the depreciation benefits, and the salvage value, and then solving for the lease payment amount. The correct choice reflects the lease payment that meets these criteria, taking into account the specifics of the lease terms, the depreciation method, the expected salvage value, and the required rate of return.

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