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Question 5. (20 marks) Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million dollars. This furnace will qualify for accelerated depreciation: 20% can be expense immediately, followed by 32%, 19.2%, 11.52%, 11.52% and 5.76% over the next five years. However, because of Rearden's substantial tax loss carry forwards, Rearden estimates its marginal tax rate to be only 10% over the next five years. Since Rearden will get very little tax benefit from the depreciation expense, they consider leasing the furnace instead. Suppose that Rearden and the lessor face the same 8% borrowing rate, but the lessor has a 40% marginal tax rate. Assume that the furnace is worthless after five years and the lease term is five years. (a) (5 marks) Assuming that Rearden's annual lease payments are $1.2 million, then what is the amount of the savings in year 0 from leasing? (b) (10 marks) Assuming that Rearden's annual lease payments are $1.2 million, what is the NPV of leasing? (c) (5 marks) Should Rearden Metals purchase the new blast furnace or lease it? You must create a table in the below format and fill in the necessary items and numbers. 0 1 2 3 4 5 Year Buy Capital expenditures -5,000,000 Lease Lease payments - 1,200,000 -1,200,000 -1,200,000 -1,200,000 -1,200,000 Question 5. (20 marks) Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million dollars. This furnace will qualify for accelerated depreciation: 20% can be expense immediately, followed by 32%, 19.2%, 11.52%, 11.52% and 5.76% over the next five years. However, because of Rearden's substantial tax loss carry forwards, Rearden estimates its marginal tax rate to be only 10% over the next five years. Since Rearden will get very little tax benefit from the depreciation expense, they consider leasing the furnace instead. Suppose that Rearden and the lessor face the same 8% borrowing rate, but the lessor has a 40% marginal tax rate. Assume that the furnace is worthless after five years and the lease term is five years. (a) (5 marks) Assuming that Rearden's annual lease payments are $1.2 million, then what is the amount of the savings in year 0 from leasing? (b) (10 marks) Assuming that Rearden's annual lease payments are $1.2 million, what is the NPV of leasing? (c) (5 marks) Should Rearden Metals purchase the new blast furnace or lease it? You must create a table in the below format and fill in the necessary items and numbers. 0 1 2 3 4 5 Year Buy Capital expenditures -5,000,000 Lease Lease payments - 1,200,000 -1,200,000 -1,200,000 -1,200,000 -1,200,000