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. 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.

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

2. Referring to Q1. If the lease payments start at the beginning of the year, would your recommendation change? How?

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