1. Your firm needs $15 million of new manufacturing equipment. If purchased, the equipment will be depreciated straight-line over five years, after which you estimate you could sell the equipment for $1.25 million. In this case, you are also responsible for $1 million per year of maintenance costs. If leased, the annual lease payments will be $4.2 million per year for five years (beginning of year payments). Maintenance is included with the lease, but the lease does require a $0.5 million security deposit. The security deposit will be returned at the end of the lease if the asset is returned in acceptable condition (reflecting only normal wear-and-tear). Your cost of borrowing is 7%, your marginal tax rate is 21%, and the lease qualifies as a true tax lease. What the NPV of the lease vs buy decision and should your firm lease the asset or borrow money to purchase it? 2. Your firm plans to purchase or lease $275,000 worth of excavation equipment. If purchased, the equipment will be depreciated straight-line over five years, after which it is worthless. If leased, the firm will make annual lease payments at the beginning of each of the next five years (first payment today). The lease also requires a security deposit of $20,000 today. The security deposit will be returned at the end of the lease if the asset is returned in acceptable condition (reflecting only normal wear-and-tear). Your cost of borrowing is 7.5%, your marginal tax rate is 21%, and the lease qualifies as a true tax lease. What is the maximum pre-tax lease payment for which you would prefer the lease to the alternative of borrowing money to buy the equipment?

3. Your firm needs a $725,000 machine. If purchased, the machine will be depreciated straight-line over seven years and is expected to have a residual value of $25,000 at the end of the seventh year. Your (pre-tax) cost of borrowing is 6.5% and tax rate is 21%. If this is a non-tax lease, with beginning of year payments, what is the maximum lease payment for which you would prefer the lease to the alternative of borrowing money to buy the machine?