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MACRS Depreciation and Leasing Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS (see Chapter 6 for the depreciation allowances).

Setting the Lease Payment Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax loss carryforwards. Thus, Quartz's effective tax rate is zero. Quartz plans to lease equipment from New Leasing Company. The term of the lease is five years. The purchase cost of the equipment is \(\$ 780,000\). New Leasing Company is in the 35 percent tax bracket. There are no transaction costs to the lease. Each firm can borrow at 7 percent. 1\. What is Quartz's reservation price? 2\. What is New Leasing Company's reservation price? 3\. Explain why these reservation prices determine the negotiating range of the lease.

Leasing and Salvage Value Suppose it is estimated that the equipment will have an aftertax residual value of \(\$ 700,000\) at the end of the lease. What is the maximum lease payment acceptable to Wildcat now?

Setting the Lease Price An asset costs \(\$ 475,000\) and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The corporate tax rate is 34 percent, and the appropriate interest rate is 10 percent. 1\. What set of lease payments will make the lessee and the lessor equally well off? 2\. Show the general condition that will make the value of a lease to the lessor the negative of the value to the lessee. 3\. Assume that the lessee pays no taxes and the lessor is in the 34 percent tax bracket. For what range of lease payments does the lease have a positive NPV for both parties?

Lease or Buy Wolfson Corporation has decided to purchase a new machine that costs \(\$ 5.1\) million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 35 percent. The Sur Bank has offered Wolfson a four-year loan for \(\$ 5.1\) million. The repayment schedule is four yearly principal repayments of \(\$ 1,275,000\) and an interest charge of 9 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of \(\$ 1.5\) million per year are due at the beginning of each of the four years of the lease. 1\. Should Wolfson lease the machine or buy it with bank financing? 2\. What is the annual lease payment that will make Wolfson indifferent to whether it leases the machine or purchases it?

Setting the Lease Price An asset costs \(\$ 330,000\) and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 7 percent and the lessee can borrow at 9 percent. The corporate tax rate is 34 percent for both companies. 1\. How does the fact that the lessor and lessee have different borrowing rates affect the calculation of the NAL? 2\. What set of lease payments will make the lessee and the lessor equally well off? 3\. Assume that the lessee pays no taxes and the lessor is in the 34 percent tax bracket. For what range of lease payments does the lease have a positive NPV for both parties?