1 Assuming 0% taxes. Equipment can be leased at $12000 per year (first payment at end of year) for nine years or purchased at a cost of $68000. The company has a weighted average cost of capital of 12%. A bank has indicated that it would be willing to make the loan of $68000 at a cost of 10%. There is no salvage value. Should the company buy or lease?

A none of them

B Buy; PV of Buy option lower than Lease option

C Buy; PV of Lease option lower than Buy option

D Lease; PV of Lease option lower than Buy option

E Lease; PV of Buy option lower than Lease option

2 Now assume a marginal tax rate of 40% and that a loan can be obtained from the bank at a cost of 9%. Should the firm buy or lease? The PV of the depreciation expense is 60% of the original investment. Assume a 5.4% discount rate. Explain your answer on Excel.

A Lease; PV of Lease option lower than Buy option

B Lease; PV of Buy option lower than Lease option

C Buy; PV of Buy option lower than Lease option

D none of them

E Buy; PV of Lease option lower than Buy option

3 Referring to Q2. If the lease payments start at the beginning of the year, would your recommendation change? How?

Explain your answer on Excel.

A Buy; PV of Buy option lower than Lease option

B Lease; PV of Lease option lower than Buy option

C Lease; PV of Buy option lower than Lease option

D Buy; PV of Lease option lower than Buy option

E none of them