Your company is considering leasing or purchasing an asset that costs $1,000,000. The asset, if purchased, will be depreciated on a straight-line basis over six years to a zero residual value. A leasing company is willing to lease the asset for $300,000 per year; the first payment on the lease is due at the time the lease is undertaken (i.e., year 0), and the remaining five payments are due at the beginning of years 1 5. Your company has a tax rate Tc=40% and can borrow at 10% from the bank.

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Part a Asset cost Interest rate Lease rental payment 1 000 000 10% Annual depreciation Tax rate 300 000 166 667 =B2/6 40% 0 1 2 3 4 5 6 Year After-tax cash flows from leasing After-tax lease rental After-tax cash flows from buying the asset Asset cost Depreciation tax shield Net cash flow from buying Differential cash flow Lease minus buy IRR of differential cash flow Decision?? Break-even IRR #NAME? Part a Asset cost Interest rate Lease rental payment 1 000 000 10% Annual depreciation Tax rate 300 000 166 667 =B2/6 40% 0 1 2 3 4 5 6 Year After-tax cash flows from leasing After-tax lease rental After-tax cash flows from buying the asset Asset cost Depreciation tax shield Net cash flow from buying Differential cash flow Lease minus buy IRR of differential cash flow Decision?? Break-even IRR #NAME?