Question: Your company is considering either purchasing or leasing an asset which costs $1,000,000. The asset, if purchased, will be depreciated on a straight-line basis over 6 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 5 payments are due at the beginning of years 1-5. Your company has a tax rate = 40% and can borrow at 10% from its bank.
a. Should your company lease or purchase the asset?
b. What is the maximum lease payment it will agree to pay?