Purchase Solution

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...

Not what you're looking for?

Ask Custom Question

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.)

Purchase this Solution

Solution Summary

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

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 ...

Purchase this Solution


Free BrainMass Quizzes
Lean your Process

This quiz will help you understand the basic concepts of Lean.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce