Group would have to pay the bank $10 in interest at the end of each year, plus return the $100 in principal at the end of Year 2. For simplicity, assume that the Group could depreciate the entire cost of the machine over two years for tax purposes by the straight-line method if it were purchased, resulting in tax depreciation of $50 in each year. Furthermore, the Group's tax rate is 40 percent. Thus, the depreciation expense produces a tax savings, or tax shield, of $50 .40 =

$20 each year. Also, for simplicity, assume the equipment's value at the end of two years (its residual value) is estimated to be $0.

Alternatively, the Group could lease the asset under a guideline lease for two years for a payment of $55 at the end of each year. The analysis for the lease versus-buy decision consists of:

If I have the following charts:

Cash flows if the group buys:

Year 0 Year 1 Year 2

Equipment Cost ($100)

Loan amount 100

Interest expense ($10) ($10)

Tax savings from interest 4 4

Principal copayment (100)

Tax Savings from depreciation 20 20

Net Cash flow $0 $14 ($86)

Cash flows if the group leases:

Year 0 Year 1 Year 2

Lease payment ($55) ($55)

Tax savings from payments 22 22

Net Cash flow $0 ($33) ($33)

Please explain why the Present Value of buying is $63.33 and

Present Value of leasing is $60.50