Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%,and the corporate tax rate is 34%. What is the appropriate discount rate for valuing the lease?
A) 2.72%
B) 5.28%
C) 8.00%
D) 12.12%
E) None of these.

Question

Quizplus · Accepted Answer

To find the appropriate discount rate for valuing the lease, we need to calculate the after-tax cost of debt.

The after-tax cost of debt = Pretax cost of debt x (1 - corporate tax rate)
= 8% x (1 - 0.34)
= 5.28%

Therefore, the appropriate discount rate for valuing the lease is 5.28%. Hence, the answer is B.

Your Firm Is Considering Leasing a New Robotic Milling Control