Your company is considering leasing or purchasing an asset that costs $1,000,000. The asset, if purchased, will be depreciated on a straight-line basis over six years to a zero residual value. A leasing company is willing to lease the asset for $300,000 per year; the first payment on the lease is due at the time the lease is undertaken (i.e., year 0), and the remaining five payments are due at the beginning of years 1 5. Your company has a tax rate Tc=40% and can borrow at 10% from the bank.

b) What is the maximum lease payment it will agree to pay?

Part b \begin{tabular}{|l|r|} \hline Asset cost & 1,000,000 \\ \hline Interest rate & 10% \\ \hline Lease rental payment & 214,931 \\ \hline Annual depreciation & 166,667 \\ \hline Tax rate & 40% \end{tabular} Year After-tax cash flows from leasing After-tax lease rental After-tax cash flows from buying the asset Asset cost Depreciation tax shield Net cash flow from buying Differential cash flow Lease minus buy IRR of differential cash flow Decision?? \#NAME? Break-even IRR To answer part b: use Solver to find lease payment =