question on lease or buy

Permafrost plc has decided to acquire a new computer network but is uncertain whether to buy the system or to lease it from Slush plc. If the system is bought it will cost £800,000 and Permafrost plc would finance this with new debt. Information on the two options is as follows.

Option 1
If the system is leased, Slush plc will expect an annual lease payment of £150,000 per year, payable in advance. Slush plc will be responsible for servicing the system, at no additional cost, over the eight-year life of the system.

Option 2

If the system is bought, Permafrost plc will be responsible for servicing the system at an annual cost of £10,000. It has a choice of three financing methods.
(1) It could issue 12% debentures, to be redeemed in 8 years time at par. The debentures will be secured on existing fixed assets.
(2) It could raise an 8-year floating rate bank loan. This loan would be repaid in equal instalments over its life and secured on existing land and buildings.
(3) It could issue zero coupon bonds, to be redeemed at par in 8 years.

Permafrost plc pays tax one year in arrears at an annual rate of 30% and can claim capital allowances on a 25% reducing balance basis. The current before-tax cost of debt of the company is 10% and this is not expected to change as a result of the financing choice made in connection with the new computer network.

Required:

(a) Determine the expected market values of the debenture issue and the zero coupon issue, and critically discuss the relative merits of the three debt finance methods being considered by Permafrost plc.
[12 marks]
(b) Using the information provided, write a report that advises Permafrost plc on whether it should lease or buy the new computer network.
[13 marks]
[Total: 25 marks]