What is the present value of the after-tax lease payments

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Point 1: LNZ Corp is thinking about leasing equipment to make tinted lenses. this equipment would cost $3,400,000 if purchased. the cca rate on the equipment is 40% and the salvage value after its five year life will be $350,000. there are no capital gains to worry about. the firm's corporate tax rate is 40% and its pre-tax cost of debt is 12%. WeLease Corp has offered to lease the system to LNZ for payments of $710,000 per year for five years. these lease payments would be made at the START of the year. assume that the tax deductibility benefit of the lease payments occurs at the same time the lease payments are made.

Question a) What is the present value of the after-tax lease payments

Question b) pretend that your answer to the previous question was exactly 2,000,000. if the present value of the CCA tax shielf on the equipemnt is $1030,032 what would be the NAL (net advantage of leading) for LNZ?

Question c) now suppose that there are maintenance costs on the equipment of 30,000 per year for five years (paid at year end). these costs would have to be paid by the firm if they purchase the equipment, but if they lease it instead, the maintenace costs are already included in the lease payment. how would these maintenace costs affect the NAL for LNZ?

Reference no: EM132485888

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