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Develop an Excel spreadsheet model for the following: Lease Corp. is considering a lease to XYZ Corp. for some new manufacturing equipment. The lease would be a 4-year contract with a lease payment of $292,000 per year. In addition, payments for this particular lease are to be made at the end of the year and would include maintenance. If Lease Corp. agrees to lease the item to XYZ Corp, they will have to purchase the equipment outright for $790,000 and also will have to pay the local dealer $22,000 at the end of each year for maintenance service. The equipment falls into the MACRS 3-year class and has a resale value of $44,000. The lessors tax rate is 25% and the lessees tax rate is 34%. Lease Corp. requires a 12.25% after-tax return on equipment it leases, which is also its WACC (i.e., in this problem you only need to use one discount rate). Answer the following questions:

a. Should Lease Corp. write the lease? Why or why not? In your Microsoft Word answer, be certain to discuss the NAL of the lease. Using Excel, create a template similar to the one shown on the next page and title the tab NAL.

b. Assuming a resale value of $44,000, what will Lease Corp. decide to do if they require a 12.50% return on the lease? What is the NAL? How does this affect the lease analysis? Do you write the lease?

c. Suppose that there is a 30% chance that the residual value (i.e., resale value of the equipment) will only be $22,000, another 20% chance that the residual value will be $88,000, and a 50% probability that the residual value will be $44,000. Assuming a 12.25% required return on the lease, what is Lease Corp.s best and worst case NAL? What is its expected NAL? Make sure to use your Excel spreadsheet to find the NAL using each possible residual value. Recall that we can calculate the Expected NAL similar to how we calculate weighted average returns: Expected NAL = (NAL * probability)

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