Please Help!!! Finance test question

[breaker99_00]

Hi all,

I've got a finance exam this Saturday and I'm really stuck with this section on leasing. If anyone can help explain how get the answer it would be a great help. I'm terrible at this stuff!

DogChew Products needs to replace its rawhide tanning and molding equipment. It can be used for four years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9%. The firm's tax rate is 39%. Assuming straight-line depreciation to a salvage of zero, what is the break-even lease payment?

a. $216,788
b. $256,098
c. $272,326
d. $286,209
e. $317,903

I already know the answer is D, I just don't know how to figure it out.

If anyone knows any good resources on the web that might help me, that would be great too!

Thanks for your help!

X

[Ron]

The firm can lease it for $245,000 a year

Ignore this part.

[ptxpress]

Ignore this part.

Bingo. Think about what the question is asking. To rephrase:

What is the lease payment that you would have to make in order to make borrowing the money and leasing equally beneficial...

It should boil down to a simple payment calculation:

i: 9%
PV: 930
FV: 0
n: 4

PMT: ???

[TRueter]

think of the 4-year lease payments as a 4-year annnuity

step by step solution is the following (where 'P' is the lease payment at the end of each period)

930,000 = P x PVIFA(9%,4)
930,000 = P x 3.2397
P = 930,000/3.2397
= 287,064 (I used a PVIFA table which explains the variance since it is rounded to 4 decimal places - your financial calculator would be of course more precise).

cheers,
T

[breaker99_00]

Great! Thanks for your help guys. . .