Question $1(3$ points$)$

Becky's company is considering an investment project. To start, Becky just needs to purchase an equipment priced at

$$4600.$ The equipment will follow a straight$-$line depreciation over $9$ years. The project will last $3$ years. If Becky

purchases the equipment for the project, the expected sales and costs are $$3000$ and $$1500$ each year. At the end of the

year $3,$ the expected before$-$tax salvage value of the equipment is $$4500.$ The tax rate is $20\%.$

Becky can also lease the same equipment for $3$ years and the annual leasing cost is $$600$ paid at the end of each year.

The project has the similar risk level as the other operations of the company and the company's WACC is $19\%.$ If

Becky decides to lease the equipment, she may have to reduce interest expenses in other operations of the company by

an amount equal to $50\%$ of the leasing expense to maintain the current capital structure. The company's cost of debt is

$6\%.$

What is the difference in NPV between leasing and buying the equipment?

Hints

You may need the following equations:

$FCF=$EBIT$(1-T)+DP-$net CAPx$-NWC$

Excel function: NPV

After$-$tax salvage value: $MV-(MV-BV{)}^{**}t$

Consider the NPV of the project separately for the buying and the leasing scenarios. Since Becky's company has an

optimal capital structure, the WACC approach is acceptable. However, leasing is equivalent to borrowing and may

force the company to borrow less elsewhere, losing interest shield benefits. So$,$ when calculating the NPV for the

leasing scenario, we can treat the leasing cost as interest expense.