Al-Tek is considering leasing some new equipment for 5 years with annual payments.The equipment would cost $115,000 to buy and would be depreciated straightline to a zero salvage value.The actual salvage value is zero.The applicable pretax borrowing rate is 8 percent.The lessee does not expect to owe taxes for several years.The lessor's tax rate is 21 percent.What is the minimum lease payment that will be acceptable to both parties?

Question

Quizplus · Accepted Answer

The minimum lease payment acceptable to both parties is the one that equates the cost of leasing to the cost of buying for the lessee, while also providing the lessor with a return on investment that reflects the risk of the lease. The calculation involves finding the present value of the lease payments from the perspective of both the lessee and the lessor, taking into account the tax benefits and the cost of capital. Given the information, the correct calculation would involve using the pretax borrowing rate for the lessee (since they do not expect to owe taxes) and adjusting for the lessor's tax rate. The answer provided (B) $28,745.16, is the one that correctly reflects these considerations, assuming it's calculated based on the given parameters and the standard methods for such financial analysis.

Al-Tek Is Considering Leasing Some New Equipment for 5 Years