What is the maximum lease payment acceptable to scout

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Question - Scout limited is reaching out for your suggestion to decide on the method of financing new equipment to test the efficacy of new therapeutic products. The equipment is critical in staying competitive in the drug manufacturing industry. The equipment will provide $2.6 million in annual pre-tax cost savings. The market price of the equipment is $10 million, and an annual deprecation of 2 million will result in zero book value at the end of the life of the equipment. The corporate tax rate is 25%, and the Scout can borrow at 9 percent to finance the equipment.

Solid Technology Financing is happy to finance the equipment for Scout under an operating lease agreement for a $1.9 million annual lease payment. What is the maximum lease payment acceptable to Scout if Solid requires Scout to make payments at the start of the year?

Reference no: EM133178817

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