Leasing Problem. UPS has decided to lease, rather than purchase, twenty (20) new tractor-trailer cabs. The price of these vehicles if purchased today is $50,000 each. They are assumed to have an economic life of three years for both book and tax purposes. UPS uses straight-line depreciation for book purposes and MACRS (GDS) rules with the half-year convention for tax purposes. The leasing company has offered UPS a 4-year, non-cancelable lease with an option to purchase the vehicles at the end of the lease term for $7,500 each. Each vehicle's fair market value after 4 years is estimated to be 20% of its original price. UPS plans to exercise the purchase option and then keep the vehicles indefinitely. UPS's cost of capital for present value discount purposes is 15% p.a. and its effective corporate income tax rate is 40%.

A. If the leasing company's before-tax MARR is 10% p.a., what annual lease payment will the lessor charge? Assume, for the purposes of this problem, that lease payments are recognized at the end of each year. Show all work.

B. Will this lease be treated as an operating lease or as a capitalized lease by UPS? Explain.

C. Construct a table showing all relevant entries on UPS's balance sheet and income statement for each year of the 4-year lease term. Include only those entries which are affected by the lease.

D. Construct an after-tax cash flow table for UPS for the 4-year term of the lease (assume taxes are paid in the year incurred).