Question: Black Inc. has decided to buy a new equipment that costs USD 3,200,000. The equipment will be depreciated on a straight-line basis down to zero.

Black Inc. has decided to buy a new equipment that costs USD 3,200,000. The equipment will be depreciated on a straight-line basis down to zero. The corporate tax rate is 35% and Black Inc. can borrow at 9%. Lovely Leasing Corp. is willing to lease the same equipment to Black Inc. for the lease payments of USD 0.95 million per year are due at the beginning of each of the four years of the lease.

(a)Should Black Inc. lease the equipment or buy it outright?

(b)What is the annual lease payment that will make Black Inc. indifferent to whether it leases the equipment or buys it?

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