For this assignment, you will answer the questions below and ****submit an Excel spreadsheet of your solutions*******. (This problem is worth 20 points.)

High energy costs have made a piece of equipment in your firms production process obsolete. Two machines are available to replace the existing equipment. Here are the details for Option A and Option B:

Option A: Lease

Lease payments of $65,000 per year

5 years, due at the beginning of each year

Save $15,000 per year in energy bills

Option B: Purchase

Purchase for $350,000

Energy savings of $25,000 per year

Bank will finance the loan at 10 percent on the remaining balance

Five principal payments of $66,000 will be required by the bank

Please note:

The firm has a target debt-to-asset ratio of 67 percent. The firm is in the 34 percent tax bracket.

In each option, straight-line depreciation and equipment will be worthless after 5 years.

As part of your analysis, answer the following:

1. Should your firm lease (Option A) or purchase (Option B)?

2. Does your answer depend on the form of financing for direct purchase?

3. How much debt is displaced by the debt?

4. What annual lease payment will make WCF indifferent to whether it leases or not?

(Please utilize excel in analysis/solving the problems)