XYZ Ltd Intends to Lease to Another Company for a Duration

question 26

Multiple Choice

XYZ Ltd intends to lease to another company for a duration of five years equipment which costs $500 000 and can be depreciated straight-line over three years for tax purposes.Assume the cost of capital is 10% p.a. ,the residual value is 20 per cent of cost,the tax rate is 30 per cent and that annual lease payments are payable in advance.Calculate the minimum after-tax lease payments if it desires a rate of return at 10 per cent after tax.

• A)$77 476
• B)$98 316
• C)$96 652
• D)$107 735

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Definitions:

Marginal Revenue Curve

A graphical representation showing how the revenue from selling one more unit of a good or service changes as production volume changes.

Price-searcher Firm

A company that has the ability to set the price for its products because it does not face perfect competition.

Marginal Revenue

The increase in revenue that results from the sale of one additional unit of product.

Profit-maximizing Output

The level of production at which a company achieves the highest possible profit.