ABC Corporation is considering to expand its operation by adding 5 generators. The cost of these generators would be Tk. 100 million. The expected life of the generators is 5 years. The addition of these generators will result in cash inflows of Tk. 50 million per year for 5 years. Cash outflows would be 50% of cash inflows. ABC uses straight line method of depreciation and expects no salvage value from the generators at the end their service lives. IDLC, a leading Non-Bank Financial Institution, offered ABC to lease the generators for 5 years. The lease payments to be made at the beginning of each year would be Tk. 24 million. The annualized risk-free rate of return is 7%. Tax rate for both ABC Corporation and IDLC is 30%.

1. Show the cash flows associated with the generators to ABC if it decides to buy them.
2. Show the cash flows associated with the generators to ABC if it decides to take lease on them from IDLC.
3. Show the incremental cash flows for lease versus buy to ABC of the generators.
4. Calculate the NPV from the incremental cash flows. If you are the analyst, would you recommend ABC to take a lease on the generators from IDLC or buy them?
5. Find out the NPV of the lease of the generators to IDLC. Show the calculation.
6. Assume now that ABCs tax rate is 10% while IDLCs tax rate remained at 30% and IDLC revises its offer to reduce the lease payments to Tk. 22 million a year.

(i) Now find out the NPV to ABC and to IDLC of the lease.

2. Find out the minimum lease payments that IDLC can accept and maximum lease payments that ABC can accept.