Bessey Aviation is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below:

Cash Flows (After-Tax)

End of Year Lease Purchase

1 -40,000 -68,454

2 -40,000 -59,110

3 -40,000 -63,596

4 -40,000 -66,633

5 -40,000 -30,056

27. Given the above cash outflows, calculate the present value of the after-tax cash flows of the lease alternative using the after-tax cost of debt.

28. Given the above cash outflows:

a) Calculate the present value of the after-tax cash flows of the purchase alternative using the after-tax cost of debt.

b) Which alternative do you recommend?