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# Negotiating range of the lease

Raymond Rayon Corporation wants to expand its manufacturing facilities. Liberty Leasing Corporation has offered Raymond Rayon the opportunity to lease a machine for \$100,000 for five years. The machine will be fully depreciated by the straight-line method. The corporate tax rate for Raymond Rayon is 25 percent, while Liberty Leasing corporate tax rate is 35 percent. The appropriate before-tax interest rate is 8 percent. Assume lease payments occur at year-end. What is Raymond's reservation price? What is Liberty's reservation price? What is the negotiating range of the lease?

#### Solution Preview

The reservation price is the least amount that would be acceptable as leas payments. It is calculated by setting the NPV of the cash flows = 0.
NPV = Cost - PV of lease payments, setting NPV=0 we get
0 = Cost - PV of lease payments
a. Raymond Reservation Price
The cash flows for Raymond are
The cost of the machine is \$100,000. Let L be the lease payments to be made. There will be tax benefit, so we ...

#### Solution Summary

The solution explains how to determine the negotiating range of the lease.

\$2.19