Consider the following lease versus borrow and purchase problem:

• Borrow and purchase option:

1.Jensen Manufacturing Company plans to acquire sets of special industrial tools with a four year life and a cost of $200,000, delivered and installed. The tools will be depreciated by the MACRS three year classification.

2.Jensen can borrow the required $200,000 at a rate of 10% over four years. Four equal end of year annual payments would be made in the amount of The annual interest and principal payment schedule, along with the equivalent present worth of these payments, is as follows:

End of YearInterestPrincipal1$20,000$43,094215,96147,403310,95052,14445,73657,358

3.The estimated salvage value for the tool sets at the end of four years is $20,000.

4.If Jensen borrows and buys, it will have to bear the cost of maintenance, which will be performed by the tool manufacturer at a fixed contract rate of $10,000 per year.

• Lease option:

1.Jensen can lease the tools for four years at an annual rental charge of $70,000, payable at the end of each year.

2.The lease contract specifies that the lessor will maintain the tools at no additional charge to Jensen.

Jensen’s tax rate is 40%. Any gains will also be taxed at 40%.

(a) What is Jensen’s PW of after tax cash flow of leasing at i = 15%?

(b) What is Jensen’s PW of after tax cash flow of owning at i = 15%?