6. Your firm is considering leasing a machine that will be used in the production process. The lease with a term of 4 years calls for pre-tax annual payments of $2,500,000. The leased machine would cost $10,000,000 to purchase and would be depreciated straight-line to zero salvage value (or residual value) over 4 years. The actual salvage value is negligible because of technological obsolescence. a) Assume that the tax rate is 25 percent. The firm (the lessee) can borrow at 8 percent before taxes. Compute the net advantage to leasing (NAL). Should you buy or lease? b) What are the cash flows from the lease from the lessor's viewpoint? Assume that the lessor also has 8 percent pre-tax cost of debt and 25 percent tax rate. c) What would the lease payment have to be for both the lessor and lessee to be indifferent about the lease? d) Rework problem (a) assuming that the machine will be depreciated as 3-year property under MACRS. MACRS Depreciation Allowances Year 3-Year Recovery Period Class 1 33.33% 2 44.44 14.82 3 4 7.41 6. Your firm is considering leasing a machine that will be used in the production process. The lease with a term of 4 years calls for pre-tax annual payments of $2,500,000. The leased machine would cost $10,000,000 to purchase and would be depreciated straight-line to zero salvage value (or residual value) over 4 years. The actual salvage value is negligible because of technological obsolescence. a) Assume that the tax rate is 25 percent. The firm (the lessee) can borrow at 8 percent before taxes. Compute the net advantage to leasing (NAL). Should you buy or lease? b) What are the cash flows from the lease from the lessor's viewpoint? Assume that the lessor also has 8 percent pre-tax cost of debt and 25 percent tax rate. c) What would the lease payment have to be for both the lessor and lessee to be indifferent about the lease? d) Rework problem (a) assuming that the machine will be depreciated as 3-year property under MACRS. MACRS Depreciation Allowances Year 3-Year Recovery Period Class 1 33.33% 2 44.44 14.82 3 4 7.41