1 -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. Because 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' lease-versus-purchase decision?

2- The lessee compares the present value of owning the equipment with the present value 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?

3--1. Assume that the lease payments were actually $280,000 per year, that Consolidated Leasing is also in the 40% tax bracket, and that it also forecasts a $200,000 residual value. Also, to furnish the maintenance support, Consolidated would have to purchase a maintenance contract from the manufacturer at the same $20,000 annual cost, again paid in advance. Consolidated Leasing can obtain an expected 10% pre-tax return on investments of similar risk. What would be Consolidated's NPV and IRR of leasing under these conditions?

2. What do you think the lessor's NPV would be if the lease payment were set at $260,000 per year? (Hint: The lessor's cash flows would be a "mirror image" of the lessee's cash flows.)

4-Lewis's management has been considering moving to a new downtown location, and they are concerned that these plans may come to fruition prior to the equipment lease's expiration. If the move occurs, then Lewis would buy or lease an entirely new set of equipment, so management would like to include a cancelation clause in the lease contract. What effect would such a clause have on the riskiness of the lease from Lewis's standpoint? From the lessor's standpoint? If you were the lessor, would you insist on changing any of the other lease terms if a cancelation clause were added? Should the cancelation clause contain provisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer