Your firm is considering leasing a new robotic milling control system. The operating lease lasts for 5 years. The lease calls for 5 payments of $250,000 per year with the first payment occurring at the beginning of the lease period. The system would cost $1,000,000 to buy and would be straight-line depreciated to a zero salvage value. The firm has enough cash on hand to purchase the asset. The actual salvage value is zero. The firm can borrow at 8% and the corporate tax rate is 35%. Analyze the lease vs. buy decision by recording the annual cash flows and calculating the NPV of each alternative to make your recommendation to management. Please show work on paper, do not use excel.

A.

Cash Flows from Leasing:

0 1 2 3 4 5

NPV of Leasing:

B.

Cash Flows from Buying:

0 1 2 3 4 5

NPV of Buying:

C.

Recommendation: Circle One

Lease OR Buy

D. What lease payment would make the firm indifferent between leasing versus buying the control system?