Lease

Brash Co can buy a new piece of machinery for $500,000 by borrowing under a secured loan at 8%. It has also researched thepossibility of leasing the asset.

The lease will be over de 5 years with lease payments of 146,000 annually in advance. Tax is payable 1year after the accounting year end and the corporation tax rate is 25%. Maintenance is payable by the lessor and costs $200,000 per annum payable at the end of each year, including the lastyear 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 qill retain that.

1. What is the present value of maintenance cash flows, after tax?

The answer is, years 1 to 5 maintence of $200,000 and Years 2 to 6 tax savings on the maintenance costs discounted at 6% discount rate. Annuity factor 5 years at 6% =4.212

Sir, I do not know how they found the discounting rate of 6%. It is not suppose they give the rate in the question?