Setting the Lease Price An asset
costs $640,000 and will be depreciated in a straight-line manner...

Question

Setting the Lease Price An asset
costs $640,000 and will be depreciated in a straight-line manner over its
3-year life. It will have no salvage value. The lessor can borrow at
7 percent and the lessee can borrow at 9 percent. The corporate tax rate
is 21 percent for both companies. 

a. How does the fact that the lessor and
lessee have different borrowing rates affect the calculation of the NAL? 

b. What set of lease payments will make the
lessee and the lessor equally well off? 

c. Assume that the lessee pays no taxes and
the lessor is in the 21 percent tax bracket. For what range of lease payments
does the lease have a positive NPV for both parties?

Tanmoy · Accepted Answer

SETTING THE LEASE PRICE
Table of Contents
A	3
B	3
C	3
References	5
A.
	Particulars
	Amount
	Asset
	620000
	Lessor Rate
	7%
	Lessee Rate
	9%
	Tax
	21%
	Depreciation
	620000 ÷ 3 = 206667
	Term
	3 years
	Lease Payment
	244582 assumed first
	Discount Rate
	0.0711
Here, in the case the various rates of borrowing are irrelevant. A basic tenant of the capital budgeting will be that the return of a project will be dependent on the project risk. As the lease payments are being impacted by the lessee’s riskiness,

Setting the Lease Price An asset costs $640,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The lessor can borrow at 7 percent and the lessee...

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