Bavarian Brew wants to lease a new bottling machine. The company obtains a 10-year lease requiring annual payments of $15 000 at the beginning of the year. The company is expected to exercise its option to purchase the machine at the termination of the lease for $10 000 at the end of year 10. The company is in the 35% tax bracket.

a. What is the annual after-tax cash flow for Bavarian Brew from the lease?

b. Bavarian Brew has the option to purchase the machine. If the present value of the cash flows associated with the purchase is $78 000, what is the net present value of the lease option? Assume that the company's cost of debt is 7%