XYZ Ltd intends to lease to another company for a duration of five years equipment which costs $500 000 and can be depreciated straight-line over three years for tax purposes.Assume the cost of capital is 10% p.a. ,the residual value is 20 per cent of cost and the tax rate is 30 per cent.Calculate the required present value of the lease payments.

Question

Quizplus · Accepted Answer

1. Calculate the annual depreciation expense:
Annual depreciation = Total depreciation / Years of depreciation
Annual depreciation = $500,000 / 3 = $166,667

2. Calculate the annual lease payment:
PV of lease payments = ($166,667 x 3) x (1 – 0.3) x (1 / 1.1^1 + 1 / 1.1^2 + 1 /1.1^3 + 1 / 1.1^4 + 1 / 1.1^5)
PV of lease payments = $323,065

Therefore, the required present value of the lease payments is $323,065, which is option C.

XYZ Ltd Intends to Lease to Another Company for a Duration