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 $100,000. 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 $16,900 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 8%, borrowing rate is 10% and the tax rate is 35%. The lease offered to Greymare Bus Lines had a positive NPV of $820 if Greymare paid no tax and a +$700 NPV to a lessor paying 35% tax.

1) Calculate the present value of the depreciation tax shield.

2) Calculate the minimum lease payment assuming Greymare paid no tax and the lessor paid 35% tax.

3) Calculate the maximum lease payment assuming Greymare paid no tax and the lessor paid 35% tax.