Question 3 (20 marks)

UIC needs a new research equipment. It can either buy it for $250,000 or lease it from BNU-Zhuhai Campus. The lease terms require UIC to make six annual payments (prepaid) of $62,000. UIC pays no tax. BNU-Zhuhai pays tax at 35%. BNU-Zhuhai can depreciate the computer for tax purposes over five years. The research equipment will have no residual value at the end of year 5. The interest rate is 8%.

What is the NPV of the lease for UIC? (5 marks)

What is the NPV for BNU-Zhuhai? (10 marks)

What is the overall gain from leasing? (3 marks)

What happens to the NPV of leasing if the tax rate increases? (3 marks)