[samisam]

(Net advantage to leasing) Northwood Steel, Inc. is considering leasing $1 million worth of manufacturing equipment under a lease that would require annual lease payments in arrears for five years. The net cash flows to lessee over the term of the lease (with zero residual value) are given below. Northwood's cost of secured debt is 8%, and its cost of capital is 12%. Allied pays taxes at a 40% marginal rate.
a. Calculate the net advantage to leasing.
b. Should Northwood lease, or borrow and buy?

Net Cash flow Year 0 = 1,000 ; Year 1 = -300; Year 2 = -275; Year 3 = -250;
Year 4 = -225; Year 5 = -200

[Curlyben]

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