Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply:
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. Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4th year.
What is the NAL (Net Advantage of Leasing) of the lease?
2) Net advantage to leasing problem (NAL).
ABC Industries is negotiating a lease on a new piece of equipment which would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for three years and then sold, because ABC plans to move to a new facility at that time. It is estimated that the equipment could be sold for $30,000 after three years of use. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each of the three years of usage. Conversely, ABC could lease the equipment for three years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would also include maintenance. ABC is in the 20 percent tax bracket, and it could obtain a three-year simple interest loan to purchase the equipment at a before tax cost of 10 percent. Should ABC lease or buy?