A bus company is considering acquisition of a bus for $100,000. The life of the bus is seven years. Then, it will be dispatched to the scrap yard. The bus manufacturer points out that the bus is available on lease as well for seven annual payments of $18,951 each with the first payment due immediately. The bus company would bear the costs of maintenance, insurance and operat- ing. The marginal tax rate for the bus company and the manufacturer is 35%. The bus will be subject to MACRS schedule. The borrowing rate for the bus company and the manufacturer is 10%.

1) Estimate the lease-equivalent loan.

2) Estimate the NPV of the Lease Minus Buy.

3) Calculate the IRR of the Lease Minus Buy.

4) What should the bus company do?

5) Is there another way to calculate the NPV of leasing? If yes, demonstrate.

6) Assume the following: The bus manufacturer offers to provide routine maintenance that would save a cost $3,077 p.a. before tax. The bus can be disposed off at $10,000 before tax at the end of its life. These cash flows are harder to predict than the cash flows mentioned above. Therefore, these cash flows will be discounted at 12%. Now, what should the bus company do? Explain your answer with detailed calculations.

7) Ignore the changes in Q. 6. Assume the following: The manufacturer’s tax rate is 35%. and the bus company’s tax rate is zero percent. Calculate the gain (or loss) to both the parties.

8) Ignore the changes in Q. 6 and Q. 7. Assume the following: The manufacturer’s tax rate is 35%. and the bus company’s tax rate is 20%. Calculate the gain (or loss) to both the parties.

9) Ignore the changes in Q. 6 and Q. 7. Assume the following: The depreciation schedule is on the straight line basis for the life of the lease. The manufacturer’s tax rate is 35%. and the bus company’s tax rate is 20%. Calculate the gain (or loss) to both the parties.