Compare the two financing options below by calculating their respective Net present values $($NPVs$)$:

Example

Evaluation lease financing on relation to debt financing

We assume that the firm has decided to invest $10$mil. in a project and has decided to finance the project

with either debt or lease financing

Characteristic of the lease financing:

Leasing period: $4$ years

Lease payments: advanced payment $5$ mil. at time $0,$ annual payments $2$ mil. at the end of each year.

Lease factor $1,3$

Characteristic of the borrowing:

If the asset is purchased, company would finance it with a loan of $10$ mil, payable over $5$ years with annual

payments of $2638$ at the end of each year. Interest rate of the loan $10\%.$ The company is in a $40\%$ tax bracket.

Assets lifetime is $5$ year. Discount rate $6\%.$