The questions are based on the on the Lease versus Own and Sale/Leaseback Analysis values below Please show calculations.

At what interest rate (or cost of capital or discount rate) is this analysis neutral (or, in other words, at what cost of capital would you be indifferent between owning and leasing)? Why?

OPERATING CASH FLOW:
			Difference
	Own	Lease	Own - Lease
Sales	$1,500,000	$1,500,000	0
Less: Cost of Goods Sold	750,000	750,000	0
Gross Income	750,000	750,000	0
Less: Overhead	200,000	200,000	0
Net Income (before real estate)	550,000	550,000	0
Operating Expenses	100,000	100,000	0
Lease Payments	0	200,000	-200,000
Mortgage Interest Payment	136,900	0	136,900
Tax Depreciation	50,000	0	50,000
Taxable Income	263,100	250,000	13,100
Less: Tax	78,930	75,000	3,930
Income After-Tax	184,170	175,000	9,170
Plus: Depreciation	50,000	0	50,000
Less: Mortage Balance	0	0	0
After-Tax Cash Flow	$234,170	$175,000	$59,170

CASH FLOW FROM SALE IF OWNED & SOLD AT END OF LEASE TERM:
Resale		3,000,000
Less: Mortgage Balance		1,369,000
Before-Tax Cash Flow		1,631,000
Resale	3,000,000
Less: Adjusted Basis	800,000
Capital Gain	2,200,000
Less: Tax		660,000
			Additional cash flow from owning
After-Tax Cash Flow		$971,000

CASH FLOW IF SOLD TODAY:

Resale 2,000,000

Less: Mortgage Balance 1,369,000

Before-Tax Cash Flow 631,000

Resale 2,000,000

Less: Adjusted Basis 1,550,000

Capital Gain 450,000

Less: Tax 135,000

After-Tax Cash Flow $496,000

SUMMARY OF AFTER-TAX CASH FLOW DIFFERENCES OF OWN vs. LEASE:

Outlay Cash Flow Reversion

Year 0 1 to 14 15

Initial Investment -496,000

Operations 59,170

Sale 971,000

Total ($496,000) $59,170 $971,000

This is the return from owing

IRR on ATCF differences 14.10%

Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Own	0	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	234,170	1,205,170
Lease / Sale-Leaseback	496,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000	175,000
Differnce of Own vs. Lease	-496,000	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	59,170	1,030,170

IRR on Own vs. Lease 14.10%