Alpha and Sim Leasing Case

Alpha, a tax-exempt institution, needs a new server to automate and integrate its various functions. The firm can borrow funds at 7% and buy it for $309,000. Alternatively, Sim Leasing Inc. offers to lease a server to Alpha on a five-year lease. Alpha will pay Sim $76,000 every year at the beginning of each year. The server has no value after five years. Should Alpha buy or lease?

Consider the lease from Sims perspective. Assuming Sim is in the 21% tax bracket and its cost of capital is 6%. Is it a positive NPV investment for Sim? What is the minimum lease payment that Sim must require assuming its administrative expenses amount to $500 per year? What is the maximum payment that Alpha can be charged?

The 5-year MACRS is:

Year Depreciation (%)

1 -------- 20%

2 -------- 32%

3 -------- 19%

4 -------- 12%

5 -------- 12%

6 -------- 5%