(2) Explain the rationale for the discount rate you used to find the PV.

c. What is Lewis’s present value cost of leasing the equipment? (Hint: Again, construct a time line.)

d. What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis should buy or lease the equipment? Explain.

e. Now assume that the equipment’s residual value could be as low as $0 or as high as

$400,000 but $200,000 is the expected value. Since the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modify the analysis if calculations were required.) What effect would the residual value’s increased uncertainty have on Lewis’s lease-versus-purchase decision?

f. The lessee compares the cost of owning the equipment with the cost of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how should you analyze the decision to write or not to write the lease?