J&M, a tax-exempt institution, needs to store a vast amount of data. The firm can borrow funds at 7% and buy data storage devices and software for $3.2 million. Alternatively, SM Leasing Inc. offers to store and manage J&M's data on a five-year lease contract. J&M will pay Sim $788,000 every year at the beginning of each year. The data storage devices will have no salvage value after five years. Should J&M buy or lease?

 

Consider the lease from SM's perspective. Assuming SM is in the 21% tax bracket and its cost of capital is 6%. Is it a positive NPV investment for SM? What is the minimum lease payment that SM must require assuming its administrative expenses amount to $20,000 per year? What is the maximum payment that J&M can be charged?