Excellent Inc. is considering leasing or disposing of the following equipment: Cost of equipment $300,000 Less accumulated depreciation (200,000) Book value $100,000 Lease option: Total revenue for five-year lease $200,000 Total estimated repair, insurance, and property tax expenses during life of lease 50,000 Residual value at end of fifth year of lease 0 Sell option: Sales price $150,000 Commission on sales 7% Calculate the differential revenue from the lease alternative.

14.95%

Explanation:

First we will determine the market risk premium which shall be calculated as follows:

Market risk premium=Expected annual return of market-Risk free return

In the given question

Expected annual return of market=13%

Risk free return=Return on T-Bonds=6.5%

Market risk premium=13%-6.5%=6.5%

Based on above Market risk premium, the firm required return shall be calculated as follows:

Firm required return=Risk free return+Beta*Market risk premium

                                   =6.5%+1.30*6.5%

                                   =14.95%