Imagine yourself in the position of Thomas Pierce III, president of Greymare Bus Lines. Your firm was established by your grandfather, who was quick to capitalize on the growing demand for transportation between Widdicombe and nearby townships. The company has owned all its vehicles from the time the company was formed; you are now reconsidering that policy. Your operating manager wants to buy a new bus costing $87,000. The bus will last only eight years before going to the scrap yard. You are convinced that investment in the additional equipment is worthwhile. However, the representative of the bus manufacturer has pointed out that her firm would also be willing to lease the bus to you for eight annual payments of $15,600 each. Greymare would remain responsible for all maintenance, insurance, and operating expenses. Greymare no longer owns the bus and so cannot depreciate it. Therefore it gives up a valuable depreciation tax shield. We assume depreciation would be calculated using five-year tax depreciation (MACRS) schedules. Greymares cost of capital is 7%, borrowing rate is 9% and the tax rate is 35%.

1) What is the value of the lease if Greymares marginal tax rate is Tc = 0.20?

2) What would the lease value be if Greymare had to use five year straight-line depreciation for tax purposes?