Giveaway State Teacher's College is trying to decide whether to buy a new computer or to lease it from Readi Roller Leasing. The computer costs $500,000. Giveaway has a zero tax rate, whereas Readi Roller enjoys a 40% tax rate. There is no investment tax credit. The computer is expected to last five years and have no salvage value. It will be depreciated using the straight-line method. The college can borrow at a 15% interest rate. If the five annual lease fees are $147,577 paid at the end of each year,
a) What is the NPV of the lease for Readi Roller Leasing Co.?
b) What is the NPV of the lease for Giveaway State?
c) What do the results tell you about the lease/buy decision for tax-free institutions?