OLG Inc has to install a sophisticated deep hole drilling machine manufactured by PreHole for the oil extraction business. OLG can buy this machine from PreHole. It can obtain a bank loan at 12% interest rate for 100% of the purchase price. PreHole also offers lease option. The tax rate applicable to OLG is 40%. Now, OLG need to determine whether it wants to purchase or lease the required machine. Additional information provided below:

Cost of the machine (in $ million): $94

Life of the machine is 10 years

The machine will be fully depreciated over its useful life but can be scrapped at $5m at the end of 10 year. If OLG chooses to lease the machine, PreHole is responsible for the maintenance cost which is estimated to be $2m per year. However, OLG need to bear this cost if the machine owned.

Annual lease payment (payable at the end, amount in $ million): $18

Determine the relevant cashflow for lease vs buy decision and answer the following questions:

a. What is the net cost of leasing?

b. What is the net cost of buying? [

c. What is the NPV of Leasing or NAL?

d. What should be the competitive lease amount given that both OLG and PreHole have the same borrowing rate and tax rate?