Some new manufacturing equipment

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Lease Corp. is considering a lease to XYZ Corp. of some new manufacturing equipment. The lease would be a 4 year contract with a lease payment of $95,000 per year. In addition, payments are to be made at the end of the year (i.e., lease payments are in the form of an ordinary annuity) and would include maintenance. If Lease Corp. agrees to lease the item to XYZ Corp, they will have to purchase the equipment outright for $250,000 and also will have to pay the local dealer $7,000 at the end of each year for maintenance service. The equipment falls into the MACRS 3-year class and has a resale value of $25,000. The lessor’s tax rate is 40%. Lease Corp. requires a 11% after-tax return on equipment it leases, which is also its WACC (in this problem, the NAL is essentially the NPV of the lease). Should Lease Corp. write the lease?

Reference no: EM13927617

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