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Firm A is considering leasing an equipment. The equipment will provide $2.8 million in annual...

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Accounting

  1. Firm A is considering leasing an equipment. The equipment will provide $2.8 million in annual pre-tax cost savings. The cost of leasing is $8.78 million and the equipment will be depreciated straight-line to zero over five years. Assume a tax rate of 21% and a borrowing rate of 7%. Firm B has offered to lease this equipment for payments of $1.95 million per year. Assume that payments for the lease is made at the start of the year.
    1. What is the maximum lease payment that would be acceptable to Firm A?
  1. Suppose now Firm B requires Firm A to pay a $600,000 security deposit at the inception of the lease, and this amount is refunded at the end of the lease. If the lease payment is still $1.95 million. Is it advantageous for Firm A to lease the equipment now?

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