Inflation and operating leases In Problem 7, we assumed identical lease rates for old and new…

Inflation and operating leases In Problem 7, we assumed identical lease rates for old and new desks. a. How does the initial break-even lease rate change if the expected inflation rate is 5% per year? Assume that the real cost of capital does not change. (Hint: Look at the discussion of equivalent annual costs in Chapter 6.) b. How does your answer to part (a) change if wear and tear force Acme to cut lease rates by 10% in real terms for every year of a desk’s age? Problem 7 Operating leases* Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,000 desk. Desks last for six years and can be depreciated immediately. What is the break-even operating lease rate for a new desk? Assume that lease rates for old and new desks are the same and that Acme’s pretax administrative costs are $400 per desk in each of years 1 to 6. The cost of capital is 9% and the tax rate is 21%. Lease payments are made in advance, that is, at the start of each year. The inflation rate is zero.

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