Mecha Dental has undergone a capital budgeting NPV analysis and has determined they should acquire some specialized equipment for their gold exploration off the coast of Italy. Martin has been hired as a Co-op student for the summer and has been asked to do a NAL analysis to determine whether it would make more sense to lease or purchase the asset.

Martin has examined the proposed lease and has determined the following:

1. The equipment has a purchase price of $1,400,000 and has an 7 year useful life.

2. The estimated salvage value is $350,000 in 8 years.

3. If Mecha Dental acquires the equipment (accepts the proj.), they will generate after-tax cash flows of $120,000 per year.

4. If Mecha Dental purchases the equipment, it will cost the firm $5,000 today in training costs and these training costs will be expensed for income tax purposes. Under the terms of the lease, the lessor will be responsible for training costs.

5. If they lease the equipment from Dol. Industries, the lease payments will be $225,000 per year for 8 years with the payments made at the beginning of the year.

6. If the asset is purchased, Mecha Dental will be responsible for maintenance costs of $15,000 per year; if leased, the lessee will be responsible for maintenance costs.

7. The asset belongs in an asset class with a CCA rate of 35%.

8. If the asset is leased, the cost to insure the asset would be more expensive, requiring the lessee to pay an additional $5000 per year (to be paid at the beginning of the year).

Mecha Dental has marginal tax rate of 40%. The before-tax cost of debt is 9%. The lease qualifies as a true tax lease for tax purposes.

A. Should Mecha Dental lease or buy the equipment? Show all work, no excel. Must show how each number was obtained.

B. Calculate the maximum amount of annual lease payment Mecha Dental would be willing to make.