Riverton mining will either purchase or lease a new $756,000 excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over 7 years. Assume the equipment has taxable salvage value of $50,000 at the end of the 7 years. Riverton Mining can lease the equipment for $125,000 per year for 7 years. (Lease payment payable at beginning of each period.) Lease payments are tax-deductible. Rivertons tax rate is 35%. The companys borrowing rate for a loan, if purchasing the asset, would be 7%.

i) What are the free cash flow consequences of buying the equipment and then selling it after 7 years?

ii) What are the free cash flow consequences of leasing the excavation equipment?

iii) What are the incremental free cash flows of leasing versus buying/selling?

iv) What is the IRR of the lease-buy cash flows? How does this compare to the firms after-tax cost of borrowing?