S (of 5) 10.00 points Problem 16-31 Koss Leasing requires a 14 percent return on

Question

S (of 5) 10.00 points Problem 16-31 Koss Leasing requires a 14 percent return on its investments. It is prepared to lease you a truck for two years, provided that it can achieve this return. The lease payments are to be made at the beginning of the year. The truck, which has a useful economic life of six years, cost Koss $60,000. Its estimated value in two years is $17,000. The CCA rate is 30 percent, and Koss's tax rate is 25 percent. Calculate the annual lease payment required by Koss Leasing. (Do not round intermediate calculations. Round the final answer to the nearest whole dollar.) Annual lease payment References eBook & Resources Worksheet Problem 16-31

Explanation / Answer

The amount invested for 2 years is 60000-17000 = 43000 amount of depreciation for the first year = 60000*30%= 18000 tax shied= 18000*25% 4500 amount of depreciation for the second year =( 60000-18000)*30%= 12600 tax shied= 12600*25% 3150 Total tax shield 7650 Total expense at the end of 2 years = 43000-7650 35350 let the total lease payments be x (0.75x-35350)/35350=0.14 since return of 14 % is required 0.75x-35350=4949 0.75x= 40299 x=53732 The annual lease payment = 53732/2= 26866 Answer: 26866

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