Cat Co. has decided that it needs ten new modern buses

The buses cost $200,000 each (total of $2million) . Two alternative financial arrangements are available to the company.

1. It can use the facilities of a bank for a term loan of five years at theinterest rate of 20%. If the company is to take this loan and pay cash to the

manufacturer, the list price will be cut by 10%, to $180,000 per bus.

2. The bus builder can also act as a lessor and offer a five-year lease toCat Co. so that Cat Co. can obtainuseof Buses without purchasing them. The

arrangement calls for Cat Co.to pay $500,000 at the beginning of each year for fiveyears. If the company is to take this option, the (LPA), an organization that promotes leasing contracts, will pay Cat Co. $160,000 at the end of year 5.

The investment can be depreciated for tax purposes at a 50% declining rate. The capital cost of the buses will be added to theexisting poolof Cat Co.

The buses will only be good for scrap after five years. The scrap value is estimated to be $12,000 perbus for a total of $120,000.

CatCo. willnot pay tax for the foreseeable future but themanufacturer's tax rate is 50%.

1. What is the NPV lease for the manufacturer?