ABC Enterprises has evaluated and decided to acquire the new AI system to facilitate its production process which would enable an annual cost savings of $3 million. The AI system will cost $10 million to purchase and it will be depreciated over five years with no residual value. ABC can also lease the same system for five years at an annual lease payment of $2.3 million and an initial refundable deposit of $2 million which will be refunded at the end of the lease period. ABCs tax rate is 30% and it can borrow at 7%.

1. Should ABC buy or lease the AI system?
2. While discussing with the lease company, ABC believes that a further reduction in the annual lease payment might be possible. What is the maximum annual lease payment that ABC is acceptable?
3. Please provide TWO advantages of leasing over purchase.