Question 1

White Corporation has decided to purchase a new machine that costs $2.4 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 24%. The Black Bank has offered White a 4-year loan for $2.4 million. The repayment schedule is four yearly principal repayments of $600,000 and an interest charge of 9% on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Grey Leasing Corporation offers to lease the same machine to White. Lease payments of $710,000 per year are due at the beginning of each of the four years of the lease.

1. Should White lease the machine or buy it with bank financing?

2. What is the annual lease payment that will make White indifferent to whether it leases the

   machine or purchases it?

Question 2

A machine costs $640,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The lessor can borrow at 7% and the lessee can borrow at 9%. The corporate tax rate is 21% for both companies.

1. How does the fact that the lessor and lessee have different borrowing rates affect the calculation of the NAL?

2. What set of lease payments will make the lessee and the lessor equally well off?

3. Assume that the lessee pays no taxes and the lessor is in the 21% tax bracket. For what

   range of lease payments does the lease have a positive NPV for both parties?