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If they lease then there will be lease payments of 380,000 a year from time 0 to time 3.
There will also be a tax saving of 30% x 380,000 = 114,000 a year from time 1 to time 4.Discounting at 6%, the PV of the payments is 1,395,740. The PV of the tax savings is 395,010.
Therefore the NPV of the leasing flows is 395,010 – 1,395,740 = $1,000,730 ( 1,001,000 to the nearest thousand).
I do explain all of this (with examples) in my free lectures on lease v buy. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Thank you, I have rewatched it and it is much clearer now. Also I realised that your example is even more interesting because of the timing factor for tax. This now seems much easy than before in comparison!
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