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 the above

Question

Quizplus · Accepted Answer

The minimum lease payment is calculated by finding the present value of the cost of buying the system, considering tax shields from depreciation and the cost of borrowing. The present value of the depreciation tax shield is $1,050,000 * 34% = $357,000. The present value of the lease payments must equal the present value of the cost minus the tax shield. Solving for the lease payment using the present value of an annuity formula gives approximately $217,645.

Your Firm Is Considering Leasing a New Robotic Milling Control