Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. acme has branched out to rentals of office furnitu

Acme has branched out to rentals of office furniture to start-up companies. Consider a $5,000 desk....

Free

90.2K

Verified Solution

Question

Finance

Acme has branched out to rentals of office furniture to start-upcompanies. Consider a $5,000 desk. Desks last for six years and canbe depreciated on a five-year MACRS schedule. Assume that leaserates for old and new desks are the same and that Acme’s pretaxadministrative costs are $800 per desk at the beginning of eachyear. The cost of capital is 9% and the tax rate is 35%. Leasepayments are made in advance, that is, at the start of each year.The inflation rate is zero. What is the break-even operating leaserate for a new desk? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.) Break-even operating leaserate

Answer & Explanation Solved by verified expert
4.0 Ratings (470 Votes)

NPV of owning = -5000+PV of depreciation tax shields-PV of after tax administrative costs (annuity due)
Depreciation tax shield is worked out below:
Year Depreciation % Depreciation Tax shield at 35% PVIF at 9% PV at 9%
1 20.00 $               1,000 $       350.00 0.91743 $             321
2 32.00 $               1,600 $       560.00 0.84168 $             471
3 19.20 $                  960 $       336.00 0.77218 $             259
4 11.52 $                  576 $       201.60 0.70843 $             143
5 11.52 $                  576 $       201.60 0.64993 $             131
6 5.76 $                  288 $       100.80 0.59627 $                60
4.48592 $          1,386
NPV of owning = -5000+1386-800*(1-35%)*PVIFAD(9,6) 4.88965
= 5000+1386-800*0.65*4.88965 = $               3,843
Breakeven after tax operating lease rent = 3843/4.88965 = $                   786
Brekeven before tax operating lease rent = 786/65% = $               1,209

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Acme has branched out to rentals of office furniture to start-upcompanies. Consider a $5,000 desk. Desks last for six years and canbe depreciated on a five-year MACRS schedule. Assume that leaserates for old and new desks are the same and that Acme’s pretaxadministrative costs are $800 per desk at the beginning of eachyear. The cost of capital is 9% and the tax rate is 35%. Leasepayments are made in advance, that is, at the start of each year.The inflation rate is zero. What is the break-even operating leaserate for a new desk? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.) Break-even operating leaserate

Other questions asked by students

Q

We have two possible models in two-way ANOVA: the fixed effects model and the random effects...

Statistics
Q

Consider the ramifications of Mill’s perspective on free speech with reference to any of the contemporary...

Psychology
Q

Using the information on process management, explain how some of the tools described (e.g., flowcharts, histograms,...

General Management
Q

How many degrees are in a semicircle 270 180

Geometry
Q

The pressures caused by pure tones on the eardrum are sinusoidal The change in pressure...

Basic Math
Q

Suppose a student finds the following values of x and f x x If f...

Calculus
Q

Identify the asymptotes domain and range o f x 5 X 2 f x 4...

Algebra
Q

2 Are 6b and 6b3 like terms Why or why not 3 Are 5ab and...

Algebra
Q

chp19 . please use complete sentences :) 1, Explain the difference between variable...

Accounting
Q

Martha, an accrual-method taxpayer, has an accounting practice. In 2012, she performs tax analyses for...

Accounting
Q

Kroll Dog Care Co. wants to finance a new animal shelter by making twelve annual...

Accounting
Q

Herald Company sold merchandise for which it received $1,065,600, including sales and excise taxes. All...

Accounting