Question

Bird Wing Bedding can lease an asset for 4 years with payments of $24,000 due at the beginning of the year. The firm can borrow at a 9% rate and pays a 25% federal-plus-state tax rate. The lease qualifies as a tax-oriented lease. What is the cost of leasing? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

Answer #1

Cost of leasing = total present value of after-tax lease payments

after-tax lease payment = before-tax lease payment * (1 - tax rate)

after-tax lease payment = $24,000 * (1 -25%) = $18,000

present value = future value / (1 + discount rate)number of years

discount rate = after-tax borrowing cost = interest rate * (1 - tax rate) = 9% * (1 - 25%) = 6.75%

Cost of leasing = $65,454

Cost of leasing = $65,454

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