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Should Orange lease or buy the machine

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Question - Orange Company is contemplating whether to buy or lease a machine. The machine costs $500,000 and has economic life of 5 years. If purchased, it would be depreciated to zero using straight-line depreciation method. Orange can lease this machine from South Haven Corporation (SHC) for a yearly lease payment of $120,000 at the beginning of each year. Orange's tax rate is 25% and its cost of debt is 8%. SHC's tax rate is 20%. 

a) Should Orange lease or buy the machine?

b) What lease payment would make Orange indifferent between leasing and buying?

c) What is NPV to SHC?

d) In what lease range would the transaction take place?

Reference no: EM132967770

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