A professor in finance wants to buy a Porsche 911 (a luxury car). As buying a Porsche 911 outright is too expensive, he wants to lease and is faced with the choice between two firms. Firm 1 offers a two-year lease which costs 400 per month for 24 months. Firm two offers a three-year lease which costs 4000 in years 1 and 2, and 6000 in year 3. The professor uses the current market interest rate of 2% to assess the options. [12 marks] (a) What is the yearly cost of the option offered by Firm 1? [2 marks] (b) Using the yearly cost and assuming that it is paid at the end of the year, what is the NPV (or present value of the cost) of leasing from Firm 1? [3 marks] Page 4 / 5 () What is the NPV (or present value of the cost) of leasing from Firm 2 if payments to Firm 2 are made at the beginning of each year? [3 marks) (d) Using the replacement chain approach and assuming that the contract offers remain available once the initial leases are over, decide whether the professor should lease from Firm 1 or Firm 2. [4 marks]