Question

An asset has a purchase price of $90,000, CCA rate of 26%, maintenance is $750 at the end of each year, and expected salvage value is $0 at the end of its useful life in 5 years. The lessee pays no taxes, and the cost of debt is 15%. What is the maximum lease payment due at the beginning of each year acceptable to the lessee?

Answer 1

The maximum lease payment due at the beginning of each year acceptable to the lessee is $26,802.04.

Step-by-step explanation:

The maximum lease payment due at the beginning of each year acceptable to the lessee can be calculated using the present value annuity formula. The formula is:

Lease Payment = (Initial Cost + Annual Maintenance) / Present Value Annuity Factor

Using the given information, the lease payment can be calculated as follows:

1. Initial Cost = $90,000
2. Annual Maintenance = $750
3. CCA Rate = 26%
4. Useful Life = 5 years
5. Salvage Value = $0
6. Cost of Debt = 15%
7. Present Value Annuity Factor = (1 - (1 + Cost of Debt)-Useful Life) / Cost of Debt
8. Calculate the Present Value Annuity Factor = (1 - (1 + 0.15)^-5) / 0.15 = 3.352
9. Lease Payment = ($90,000 + $750) / 3.352 = $26,802.04

Therefore, the maximum lease payment due at the beginning of each year acceptable to the lessee is $26,802.04.