(1) Who are the two parties to a lease transaction?

(2) What are the five primary types of leases, and what are their characteristics?

(3) How are leases classified for tax purposes?

(4) What effect does leasing have on a firm's balance sheet?

(5) What effect does leasing have on a firm's capital structure?

b. (1) What is the present value of owning the equipment? (Hint: Set up a time line that

shows the net cash flows over the period t 0 to t 4, and then find the PV of

these net cash flows, or the PV cost of owning.)

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

c. What is Lewis's present value 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. 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?

f. 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