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.

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?