Lyon Co. purchases a capital asset at a cost of $900 million for an investment project, which will generate an income stream over a five-year period. The annual income stream is risky, with:

0.5 chance of $150 million

0.5 chance of $500 million

Lyon Co. is allowed to depreciate the asset in equal installments over its five-year life. The tax rate is 30% when taxable income is greater than 0. Lyon Co. does not pay tax when the taxable income is below or equal to 0. Assume zero discount rate.

What is NPV of this project without risk management?

Suppose Lyon Co. can hedge its earnings to fix earnings at the expected value of $325m. What's NPV in this case?

Consider that there is another firm, Company L, which would always have more than enough income to receive the full benefit of the deduction. Company L buys the aforementioned asset at $900 million and leases it back to Lyon Co. at an annual charge of 126m.

If Lyon Co. is able to deduct the cost of the lease as an ordinary expense, what's NPV in this case? Compare this NPV with the one calculated in (2) and explain the difference with calculation.