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Brash Co can buy a new piece of sophisticated machinery for $500,000 by borrowing under
a secured loan at 8%.
The lease will be over 5 years with lease payments of $146,000 annually in advance (at the
start of each accounting period). Tax is payable 1 year after the accounting year-end and
the corporation tax rate is 25%. Maintenance is payable by the lessor and costs $20,000
per annum payable at the end of each year, including the last year in preparation for sale.
The residual value is expected to be $40,000 (the expected tax written down value at the
end of the lease) and the lessor will retain that.question:-hat is the present value of the tax relief on the lease payments, after tax,
answer:-Years 2 – 6 tax relief of $146,000 × 0.25 = $36,500 discounted at 6% post-tax discount
rate.
$36,500 × 4.212 × 0.943 = $144,975sir i understood everything in this question except this 0.943 … what is this why we have mulitiplied it ??
There are 5 years of tax payments and therefore the answer is multiplying by the 5 year annuity factor at 6% (which is 4.212).
However the annuity starts from time 2 instead of from time 1 and therefore the answer needs to be multiplied by the 1 year present value factor at 6% (which is 0.943) to discount for this extra year.
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