Question

The overall gain from leasing is the sum of the lease’s value to the lessee and its value to the lessor. Construct simple numerical examples showing how this gain is affected by a. The rate of interest. b. The choice of depreciation schedule. c. The difference between the tax rates of the lessor and lessee. d. The length of the lease.

Answer 1

The overall value of the lease if affected by -

• The rate of interest - if interest rates are higher, the lessee needs to pay more amount to the lessor periodically, which increases the lease's value.
• Choice of depreciation - if the lessee acquires the asset and hence it comes on its balance sheet, the asset, in turn, needs to be depreciated. Hence this affects the lessee's income statement.
• Difference between tax rates - when there is a gap between the marginal tax rate of both parties, government tax revenues cover up for saving taxes of both parties. The lender benefits from lowered tax rates whereas the borrower has a lower expense.
• Length of the lease - if the lease is for a longer duration, the lessee needs to pay more a greater time period to the lessor increasing the lease's value again.