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 minimum lease payment that the lessor would be willing to accept?
A) $161,000
B) $176,995
C) $217,645
D) $237,083
E) None of these.

Question

Quizplus · Accepted Answer

The minimum lease payment is calculated by finding the after-tax cost of owning the asset and comparing it to the lease payments. The cost of owning includes the depreciation tax shield and the interest tax shield. The lessor would accept a lease payment that covers these costs.

Your Firm Is Considering Leasing a New Robotic Milling Control