Need help with attached. I especially need help with question 1 and determining the cash flows

FI307 Leasing Mini Case Due Date: 11:59 PM, Wednesday, April 20 UNITED INC. and LIBERTY LEASING United Inc.'s board has approved the manufacture and distribution of the high frequency transmitter (HFT) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the circuit board for the HFT. Because of the required sensitivity of the circuit board and its delicate frame, the company needs specialized equipment for production. Barry Jones, the company president, has found a vendor for the equipment. Liberty Equipment has offered to sell United Inc. the necessary equipment at a price of $4 million. Because of the rapid development of new technology, the equipment falls in the three-year MACRS depreciation class (https://www.irs.gov/publications/p946/ar02.html). At the end of four years, the market value of the equipment is expected to be $480,000. Alternatively, the company can lease the equipment from Liberty Leasing. The lease contract calls for four annual payments of $1,040,000, due at the beginning of the year. Additionally, United Inc. must make a security deposit of $240,000 that will be returned when the lease expires. United Inc. can issue bonds with a yield of 6 percent, and the company has a marginal tax rate of 35 percent. 1. Should United Inc. buy or lease the equipment? (please show the schedule of cashflows on a spreadsheet). What is United's reservation price for the lease (a reservation price is the most you are willing to pay for something if you are the buyer, or the least you are willing to accept if you are the seller. You can think of the reservation price as a financial breakeven point as discussed in Chapter 11). 2. Barry Jones mentions to Jerry Kelly, the president of Liberty Leasing, that although the company will need the equipment for four years, he would like a lease contract for two years instead. At the end of the two years, the lease could be renewed. Barry would also like to eliminate the security deposit, but he would be willing to increase the lease payments to $1,840,000 for each of the two years. The equipment is expected to have a market value of $1.6 million in two years. What is the NAL of the lease contract under these terms? Why might Barry prefer this lease? 3. In the leasing discussion, Jerry Kelly informs Barry Jones that the contract could include a purchase option for the equipment at the end of the lease. Liberty Leasing offers three purchase options: 1. An option to purchase the equipment at the fair market value. 2. An option to purchase the equipment at a fixed price. The price will be negotiated before the lease is signed. 3. An option to purchase the equipment at a price of $200,000. 1|Page 4. How would the inclusion of a purchase option affect the value of the lease? 4. Jerry also informs Barry that the lease contract can include a cancellation option. The cancellation option would allow United Inc. to cancel the lease on any anniversary date of the contract. In order to cancel the lease, United Inc. would be required to give 30 days' notice prior to the anniversary date. How would the inclusion of a cancellation option affect the value of the lease? 2|Page