A bank is considering a $3 million leasing program with equal rental payments due at the end of each of the next seven years. Rental payments are $532,000 and the residual value is 18% of the initial asset cost. Depreciation is based on the seven-year class of the MACRS with a shift from 150% declining balance to straight line in the fourth year (table 3-16). The after tax weighted cost of capital is 6.3% and the marginal income tax rate is 32%. What is the net present value of the leasing program? Should the bank implement the leasing program? Explain.

Lessor perspective: Operating lease
Investment	$3,000,000
Lease term, years	7
Rental payment	$532,000
Residual payment	18%
After-tax cost of capital	6.3%
marginal tax rate	32.0%
Year
	Initial investment	Rental payments	Depreciation	Remaining value	Residual value	Before-tax net cash flow	Tax	After-tax net cash flow
0
1		$532,000	-$321,429	-$321,429						$0.1071
2		$532,000	-$573,980							$0.1913
3		$532,000	-$450,984							$0.1503
4		$532,000	-$367,500							$0.1225
5		$532,000	-$367,500							$0.1225
6		$532,000	-$367,500							$0.1225
7		$532,000	-$367,500							$0.1225
8										$0.0613

PV of initial investment
PV of rental payments
PV of taxes on rental payments
PV of after-tax rental payments
PV of residual
NPV