Instead of purchasing the equipment, your team, being experienced consultants, wishes to propose to WHC that they have another option which is leasing it. Coincidently, your other client, Resolute Leasing Limited (RLL), may be a suitable lessor. On discussions, the executives at RLL have asked you to prepare a lease quotation that could be Corporate Finance (BAFI1059) S2 2020 Page 6 of 9 forwarded to WHC for consideration. For the purpose, RLL has provided the following information: RLL can get a 20% discount on the purchase price of the machinery. They expect the life of the machinery to be 15 years with a salvage value of $5 million after that. WHC may use this machinery for eight years, and RLL is confident that it can be leased to others after that. RLL uses the straight-line method for calculating depreciation. As the owner of the machinery, RLL is responsible for its annual maintenance cost. RLLs effective tax rate is 10%.

(i) If the RLLs after-tax required rate of return is 10% per annum, what will be the minimum annual lease payment that RLL would charge? Consider that RLL requires lease payments to be made annually in advance. (8 marks)

(ii) Calculate the maximum annual lease payment that would make leasing a viable option for WHC?