A company is evaluating whether to purchase or lease a machine that costs $100,000. If purchased, the machine will be classified as a MACRS 3-year asset. The required lease payments are $25,000 per year for 4 years (with beginning of year payments.) If the machine is purchased, the company will obtain a maintenance contract that costs $10,000 per year (Payments at beginning). It is estimated that the asset could be sold for $46,080 after 4 years. The companys before-tax borrowing rate is 10 percent, and its effective tax rate is 40 percent.

6. What is the NPV of buying?

7. What is the NPV of leasing?

8. Should the company lease or buy?

9. What is the Net Advantage to Leasing?

10. What is the maximum lease payment that the company would be willing to pay?

please show formulae

DE F G H I J L M N O P Q 3 Equip Cost 5 Depr. Rate 6 AT Loan Payment 7 Depr Tax Shield 8 Maintenance 9 Tax on Maintenance 10 ATSV 11 Total Cash Flow 12 NPV-Owning 13 1 2 3 14 7. What is the NPV of Leasing? 15 16 Lease Pmt 17 Tax Savings 18 Total Cash Flow 19 NPV-Leasing 20 21 8. Should the company lease or buy? 22 23 9. What is the Net Advantage to Leasing? 25 10. What is the maximum lease payment that the company would be willing to pay? 26 Hint: AFTER TAX cash flows of leasing need to have the same NPV as owning 27 Solve for Payment (PMT) 28 29 The payment amount that you just calculated is on an AFTER TAX basis, so find the BEFORE 30 TAX amount and place it in the Lease Pmt box below. 0 1 2 32 33 Lease Pmt 34 Tax Savings 35 Total Cash Flow Lease Sheet1 100 DE F G H I J L M N O P Q 3 Equip Cost 5 Depr. Rate 6 AT Loan Payment 7 Depr Tax Shield 8 Maintenance 9 Tax on Maintenance 10 ATSV 11 Total Cash Flow 12 NPV-Owning 13 1 2 3 14 7. What is the NPV of Leasing? 15 16 Lease Pmt 17 Tax Savings 18 Total Cash Flow 19 NPV-Leasing 20 21 8. Should the company lease or buy? 22 23 9. What is the Net Advantage to Leasing? 25 10. What is the maximum lease payment that the company would be willing to pay? 26 Hint: AFTER TAX cash flows of leasing need to have the same NPV as owning 27 Solve for Payment (PMT) 28 29 The payment amount that you just calculated is on an AFTER TAX basis, so find the BEFORE 30 TAX amount and place it in the Lease Pmt box below. 0 1 2 32 33 Lease Pmt 34 Tax Savings 35 Total Cash Flow Lease Sheet1 100