Darn Limited is considering investing in new moulding equipment. The equipment will cost an initial $10 million, will be deprecated straight-line to zero over its 10 year life and will have no salvage value at the end of 10 years. The incremental after tax unlevered free cash flow is expected to be $2 million in the first year, growing by 3% per year for the remaining 9 years. All cash flows are assumed to be year-end.

Darn Ltd plans to undertake the project with an initial $3million of debt at an interest rate of 8% per annum. The $3 million will maintain at that level until it is repaid at the end of the 10 years. The opportunity cost of capital with all equity financing is 12%. The tax rate is 30%.

a) Calculate the APV of the project.

b) As an alternative to purchasing the equipment, Darn is offered lease finance by AllLeasing Ltd for the whole $10million of equipment. The lease requires 10 annual year-end lease instalments of $1,406,000. The cost of secured debt to Darn Ltd is 8%p.a and the tax rate of Darn is 30%, although AllLeasing Ltd has an effective marginal tax rate of 35%.

Calculate Darn Ltd's net advantage of leasing (NAL).