Using the NAL tab, develop an Excel spreadsheet model for the following: Lease Corp. is considering a lease to XYZ Corp. for some new manufacturing equipment. The lease would be a 4-year contract with a lease payment of $292,000 per year. In addition, payments for this particular lease are to be made at the end of the year and would include maintenance. If Lease Corp. agrees to lease the item to XYZ Corp, they will have to purchase the equipment outright for $790,000 and also will have to pay the local dealer $22,000 at the end of each year for maintenance service. The equipment falls into the MACRS 3-year class and has a resale value of $45,000. The lessors tax rate is 26% and the lessees tax rate is 34%. Lease Corp. requires a 12.25% after-tax return on equipment it leases, which is also its WACC (i.e., in this problem you only need to use one discount rate). XYZ Corp. has a weighted average cost of capital of 15.76%. You will need to use the PV function to calculate the present value of each relevant cash flow. Use your template to answer the following questions:

Should Lease Corp. write the lease? Why or why not? WRITE HERE:

Suppose Lease Corp. is unsure about the actual resale value of the equipment, so they assume that there is a 30% chance that the residual value (i.e., resale value of the equipment) will only be $25,000, another 20% chance that the residual value will be $85,000, and a 50% probability that the residual value will be $45,000. Answer the following questions using the sensitivity analysis table in the NAL tab. Assuming a 12.25% required return on the lease, what is Lease Corp.s best and worst case NAL? What is its expected NAL? Should Lease Corp. write the lease? Recall that we can calculate the Expected NAL similar to how we calculate weighted average returns: Expected NAL = (NAL * probability). WRITE HERE:

Asset purchase price Lease payment 292,000 Tax rate Cost of owning Required return on lease (WACC) Salvage value (Year 4) Book value (Year 4) \#N/A MACRS Depreciation Schedule and Annual Depreciation Asset purchase price Lease payment 292,000 Tax rate Cost of owning Required return on lease (WACC) Salvage value (Year 4) Book value (Year 4) \#N/A MACRS Depreciation Schedule and Annual Depreciation