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1.
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Bridgeland Espresso has entered into a 10-year agreement to lease two espresso
machines from Coffee Machine Express for $42,000. Coffee Machine Express will depreciate the
machines on a straight-line basis over a ten-year period to a book value of $0. The company
will then salvage both machines for $4,000. Coffee Machine Express requires an after-tax return rate
of 15% and has a corporate tax rate of 40%. What is the annual after-tax lease income that
Coffee Machine Express will receive assuming payments occur at the beginning of each
year?
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3.
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Alberta
Rigs is considering leasing a $1 million oilrig to Lucky Drillers for a 5-year period. Alberta
Rigs would depreciate the oil rig on a straight-line basis so that the book value was $0 at the end
of the 5-year period. Lucky Drillers would make a lease payment of $300,000 at the beginning of
each year. At the end of the agreement, Alberta Rigs would salvage the rig for $100,000.
The company’s corporate tax rate is 30%. If Alberta Rigs’ required return is 18%,
should they sign the agreement?
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