1. Firm X needs 1 computer. There are two options available: Firm X can buy 1 computer for 2,000; or Firm X can enter into a true-tax lease for 2 years with 600 yearly payment, the first due immediately (3 payments: at 0,1, and 2). The cost of debt for Firm X is 5%. The corporate tax equals 35%. Firm X follows a straight-line depreciation method and the economic life of the computer is 2 years. Compute which method (buying or leasing) is the best to obtain the computer.

Which alternative is best:

a. Buying with a loan

b. Buying and Leasing are equivalent

c. Leasing

2.

Firm L needs 10 vans. There are two options available: Firm L can buy 10 vans for 120,000 and have an economic lifetime of 5 years; or Firm L can enter into a true-tax lease for 5 years with 30,000 yearly payment, the first due immediately (5 payments: 0,1,2,3,4). The cost of debt for Firm L is 10%. The corporate tax equals 35%. Firm L follows a straight-line depreciation method. Compute which method is the best to obtain the vans.

a. Buying with a loan

b. Leasing or buying are equivalent.

c. Leasing