A Company is proposing to lease $900,000 of new machinery. The lease terms consist of eight equal lease payments prepaid annually. The lessor can write the machinery off over 5 years using the MARCS tax depreciation schedules given in class. Salvage value is $15,000. Operating costs are $20,000 per year. The lessee will take care of maintenance costs amounting to $5,000 per year.
The tax rate is 35%, and the rate of interest is 10%. What is the maximum lease payment that the lessee company should be willing to make and the minimum payment that the lessor is likely to accept.