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problem: The lesser can claim the tax deductions associated with asset ownership & realize the leased asset's residual value. In return, the lesser must pay tax on the rental profits.

[A] Assume the lease payments in Table 21-2 must be made in advance, not arrears. [Suppose that the timing of the lease payment tax deductions obligations changes accordingly but the timing of the depreciation tax deductions does not change]. Show that the net advantage to leasing for NACCO must decrease as a result. Describe why this reduction occurs.

[B] Describe why a financial lease represents a secured loan in which the lender entire debt service stream is taxable as ordinary income to the lesser or lender.

[C] In view of this tax cost, determine what tax condition must hold in order for a financial lease transaction to generate positive net-present-value tax benefits for both the lessor and lessee?

[D] Show that if NACCO is nontaxable, the net advantage to leasing is negative & greater in absolute value than the net advantage of the lease to the lessor.

[E] Either find a lease rate that will give the financial lease a positive net advantage for both lessor and lessee, or show that no such lease rate exists.

[F] Describe what your answer to part e implies about the tax costs and tax benefits of the financial lease when lease payments are made in advance.

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  • Reference No.:- M919472

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