Your company needs new eye glass machine now. Your company can either buy the machine for $400,000 or lease it from a machinery leasing company through an operating lease in which maintenance will be provided. Your machine will not incur any other costs except the lease payment. The annual maintenance cost will cost the leasing company$25,000 per year for four years. The lease terms require your company to make four annual payments at the beginning of each year. The machine could be depreciated for tax purposes straight-line over four years and it will have no residual value at the end of year 4. The interest rate is 12%. Suppose the tax rate paid by your company is 21% but the leasing company pays only 15% tax due to carried over losses from their previous operation.

a. What is the pre-tax lease payment amount that will help the leasing company break even within 4 years if it requires 8% return.

b. What is the NPV of the lease for your company if the annual prepaid lease payment is $150,000

c. What is the NPV of the lease for the leasing company if the annual prepaid lease payment is $150,000