Walter Company needs a new $10 million machine. It is certain the new machine will save your company $4 million (pretax) per year for 8 years.
Your company's tax rate is 34%, and it can borrow at 7%. If purchased, the machine will be depreciated using 8-year straight line depreciation to a $0 value.
A leasing company is willing to lease you the machine for 8 years at $2,000,000 per year.
Assume no maintenance or other costs, and all payments are made at the end of the year.
(a) What is the NPV of the lease minus buy cash flows (the NAL)?
(b) Should you lease or buy?
(c) What is the maximum lease payment that would be acceptable to you?