A private university is considering whether to buy or lease a car for its vice-chancellor. The vehicle costs $81,000 to purchase. Alternatively, a financing lease can be arranged, with five annual lease payments of $20,000, payable in advance. If purchased, the car can be depreciated straight-line over six years. Under the lease arrangement, the university has a residual value of $16,200 at the end of the contract. You may assume that the resale value of the car at that time is $30,000. The universitys effective tax rate is 30% and it would be able to borrow to purchase the car at an interest rate of 8% p.a. Annual maintenance costs on the car are $3,000 and are the same under both options. (a) Derive the cash flows from leasing the car. (b) Derive the cash flows from purchasing the car. (c) Determine the incremental cash flows from leasing versus purchasing the car and calculate their NPV. What should the university do? Exercise 3. A shipping company needs a $370,000 machine. The machine has an economic life of four years, and will have a salvage value of $12,000 at the end of that period. It can be leased for four years for $110,000 per year, payable in advance, and with a final residual payment of $25,000. The firms borrowing rate is 12%.pa. The firms after-tax cost of capital applicable to equipment acquisition proposals is 15%. The operating and maintenance costs of the machine are the same, irrespective of whether it is leased or purchased. The firms tax rate is 30%. The tax-allowable depreciation on the machine is 25% p.a. (a) Derive the cash flows from leasing the machine. (b) Derive the cash flows from purchasing the machine. (c) Determine the incremental cash flows from leasing versus purchasing the machine and calculate their NPV. What should the company do? Exercise 4. Sigma Ltd. has 12,000,000 shares on issue, trading at $4.00 per share. The company plans to raise additional equity capital of $6,000,000 via a rights issue with a subscription price of $3.00 per share. (a) How many new shares will the company issue? (b) How many shares will an existing shareholder have to own in order to be offered one new