[coolmandrew]

I am trying to calculate the NAL of a lease from the following information. I know the answer is $108,048 but can't get the right calculation to get to the answer.

equipment cost = $1.5 million
Can obtain a bank loan for 100% of the purchase price or the equipment can be leased.

Assume the following facts:

(1) The machinery falls into the MACRS 3-year class.
(2) Under either the lease or the purchase, Big Sky must pay for insurance,
property taxes, and maintenance.
(3) The firm's tax rate is 40%.
(4) The loan would have an interest rate of 15%.
(5) The lease terms call for $400,000 payments at the end of each of the next 4 years.
(6) Assume that Big Sky Mining has no use for the machine beyond the expiration of the
lease. The machine has an estimated residual value of $250,000 at the end of the
4th year.

Thanks for any help anyone can offer!!

[amita23]

A1. (Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for
$1,000,000. The machine has a five-year life and would be depreciated straight line to a
$100,000 salvage value. Hibernia Leasing will lease the same machine to AI for five annual
$300,000 lease payments paid in arrears (at the end of each year). AI is in the 40% tax
bracket. The before-tax cost of borrowing is 10%, and the after-tax cost of capital for the
project would be 12%.
a. What cash flows does AI realize if it leases the machine instead of buying it?
b. What is the net advantage to leasing (NAL)?

[dorisdong90]

year 0 year 1 year 2 year 3 year 4
proceeds of lease 1,500,000
lease payment -400,000 -400,000 -400,000 -400,000-250,000=-650,000
tax benefit of payment 1,600 1,600 1,600 260,000
depreciation tax benefits?
(I do not know how to celculate)
total 1,500,000 A B C D

agter tax interest rate=15%(1-40%)=x
NAL=PVL-PVB PVL =1,500,000 PVB=A*(pvif (x,1)+B*(pvif(x,2))+C*(pvif(x,3))+D*(pvif(x,4))=a number