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    Leases R Us, Inc. (LRU) has been contracted by Robotics of Beverly Hills (RBH) to provide lease financing for a machine that would assist in automating a large part of their current assembly line...

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    Leases R Us, Inc. (LRU) has been contracted by Robotics of Beverly Hills (RBH) to provide lease financing for a machine that would assist in automating a large part of their current assembly line. Annual lease payments will start at the beginning of each year. The purchase price of this machine is $200,000, and it will be leased by RBH for a period of 5 years. LRU will utilize straight line depreciation of $40,000 per year with a zero book salvage value. However, salvage value is estimated to actually be $35,000 at the end of 5 years. LRU is required to earn a 14%, after-tax rate of return on the lease. LRU uses a marginal tax rate of 40%.

    Calculate the annual lease payments. (Remember, these payments are to be considered at the beginning of each year-annuity due.)

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    Solution Preview

    1. Calculate the amount to be amortized. This would be the cost of the machine less the PV of the after tax salvage value of the machine and less the PV of the depreciation tax shield.
    First let us calculate the amount to be amortized. There are three parts in this
    Cost of Machine $200,000

    PV of after tax Salvage Value
    Salvage Value $35,000

    Tax Rate 40%

    After Tax Value =35000*(1-0.4)=$21,000

    PV factor (14%, 5 years) 0.519 ( this you get from the PVIF table to find the present value of any amount you get in future)

    PV of After tax Salvage Value ...

    Solution Summary

    You will find the answer to this puzzling question inside...

    $2.19

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