A corporation has contracted to provide lease financing for a machine to automate an assembly line. Annual lease payments will start at the beginning of each year.
The purchase price of this machine is $250,000.00, and it will leased for five years. They will utilize straight line depriciation of $50,000.00 per year with a zero book salvage value. However, salvage value is estimated to actually be $50,000.00 at the end of 5 years.
A 3% quarterly after tax rate of return is required. These payments are considered annuity due at the beginning of each year. A marginal tax rate of 35% is used.
Calculate the annual lease payments. These payments are to be considered at the begining of each year - annuity due.
Please show calculations and/or formulas in excel to allow better understanding of the process.
Here is how you solve this question:
Purchase price = 250,000 minus salvage value of 50,000 = 200,000 residual value
Now take the 200,000 and divide by 5 years, equalling 40,000 per year.
A 3% quarterly after tax rate of return is required. I interpret this to mean that the interest rate on annual basis will be 12%.
(250,000 + 200,000) X 0.005 = 2,250
The 0.005 is referred to as the Money Factor. It is derived by taking 12% and dividing it by a factor of 2400.
40,000 + 2,250 gives you a total of 42,250 for a total lease payment, excluding taxes.
Taxes = 42,250 X 35% = 14,788
14,788 + 42,250 = 57,038 for a total annual lease payment including taxes.
I hope this helps.
I have attached a copy of a sample exercise to assist you for your future reference:
You can calculate a "bottom-line lease" that represents the very best deal you could get. If you get payments within $20 a month of this (in a 36-month lease), you will have done well.
To calculate a bottom-line lease ...
The annual lease payments are calculated. The purchase price of the machines are determined.