Question

The Hegan Corporation plans to lease a $840,000 asset to the Doby Corporation. The lease will...

The Hegan Corporation plans to lease a $840,000 asset to the Doby Corporation. The lease will be for 16 years. Lease payments, payable at the beginning of the year. (Use a Financial calculator to arrive at the answers. Round the final answers to nearest whole dollar.)    

a. If the Hegan Corporation desires a 12 percent return on its investment, how much should the lease payments be?

Lease payment           $

b. If the Hegan Corporation is able to generate $125,000 in immediate tax shield benefits from the asset to be purchased for the lease arrangement and will pass the benefits along to the Doby Corporation in the form of lower lease payments, how much should the revised lease payments be? Continue to assume the Hegan Corporation desires a 12 percent return on the 16-year lease.  

Revised lease payment           $

Please provide correct answers. thanks.

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Answer #1

Answer:

a. Time(n) is 16 years.
Cost of the asset = $840,000
Desired Return on investment (i) is 12 %
Lease payments are payable at the beginning of the year.

Annual lease payments = Cost of the asset / [1 + PVAF (i%, n-1)]
Annual lease payments = 840000 / [1 + PVAF(12%, 15)]
Annual Lease payments = 840000 / 7.81086
Annual Lease payments = $107,542.57

b. If the immediate benefits are to be passed in the form of lower lease payments
Then,
Revised lease payments = (840,000 - 125,000) / [1 + PVAF(12%, 15)]
Revised lease payments = 715000 / 7.81086
Revised lease payments = $91539.22

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