A computer costs $500,000 and is depreciated for tax purposes straight-line over years 1 through 5.Assume that it has zero salvage value at the end of five years.The user wishes to lease the computer by making six annual lease payments, the first of which is due immediately.If taxes are paid without delay and the rate of interest is 10 percent, what is the minimum acceptable lease payment for a lessor who pays tax at 35 percent?

Question

Quizplus · Accepted Answer

The minimum acceptable lease payment can be calculated by considering the after-tax cost of the computer and the present value of the lease payments. The computer is depreciated over 5 years, so the annual depreciation is $100,000. The tax shield from depreciation is $100,000 * 35% = $35,000 per year. The present value of these tax shields over 5 years at 10% interest is calculated and subtracted from the cost of the computer. The remaining cost is then divided by the present value of an annuity factor for 6 years at 10% interest to find the minimum lease payment.

A Computer Costs $500,000 and Is Depreciated for Tax Purposes