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# Linda C1. (Excel Break-even lease payment) The break-even

### Resolved Question:

Linda C1. (Excel: Break-even lease payment) The break-even tax rate is the income tax rate for the
lessee that would make the lessee indifferent between leasing an asset on the one hand and
borrowing and buying it on the other. Calculate the break-even lease payment for Lake
Trolley in problem B9 under the assumption that the residual value is \$500.

B9. (Net advantage to leasing) Lake Trolley Company is considering whether to lease or buy a
new year period to an estimated residual value of \$5,000. Lake Trolley’s cost of eight-year
secured debt is 12%. Its required return for the project is 16% after tax and 20% pretax.
National Trolley Leasing Corporation has offered to lease the trolley to Lake Trolley in
return for annual payments of \$5,000 payable at the end of each year.
a. Specify the incremental cash flow stream associated with the lease, assuming Lake
Trolley’s marginal income tax rate is 40%.
b. Calculate the net advantage to leasing, assuming Lake Trolley’s tax rate is 40%. Should
Lake Trolley lease, or borrow and buy?
c. Calculate the net advantage to leasing, assuming Lake Trolley’s tax rate is zero. Should
Lake Trolley lease, or borrow and buy?
d. How would your answers to parts b and c change if the residual value at the end of eight
years is \$500, but the trolley is depreciated to \$5,000? trolley that costs \$25,000. The trolley can be depreciated straight line over an eight- years is \$500, but the trolley is depreciated to \$5,000?
Submitted: 6 years ago.
Category: Homework
Expert:  Linda_us replied 6 years ago.
Customer: replied 6 years ago.
Monday
Expert:  Linda_us replied 6 years ago.
I will post the answers by tomorrow evening. Even if you have any more question you can post them now and do put "FOR LINDA" in front of your post. I will provide all the solution before the deadline.
Customer: replied 6 years ago.

That will be fine.

Expert:  Linda_us replied 6 years ago.
Ok you will get your solution by tomorrow.
Expert:  Linda_us replied 6 years ago.
Hi Customer

I am little confused with the question do you just want me to calculate break-even lease payment for Lake Trolley in problem B9 under the assumption that the residual value is \$500.

Or do you want me to solve problem B9 itself.

Regards

Linda
Customer: replied 6 years ago.
Just calculate the problem.
Expert:  Linda_us replied 6 years ago.
To be clear I shall solve B9.
Customer: replied 6 years ago.
Thank you.
Expert:  Linda_us replied 6 years ago.