Question

A company is deciding whether to lease or buy new equipment. The equipment can be purchased for $65,000 or leased for a 5 -year period for $8,750 per year (due at the beginning of each year). The firm can borrow at an after tax rate of 12%. If purchased, the company will incur insurance and maintenance costs of $1,000 per year. The equipment has a CCA rate of 24%. Salvage value in 5 years is expected to be $3,000. The company's marginal tax rate is 34%. Calculate the Net Advantage of Lease (NAL).

Answer 1

To calculate the Net Advantage of Lease (NAL), compare the costs of leasing and buying the equipment. Find the present value of the lease payments and the net present value of purchasing the equipment. Subtract the purchase cost from the present value of the lease payments to find the NAL.

Step-by-step explanation:

To calculate the Net Advantage of Lease (NAL), we need to compare the costs of leasing and buying the equipment.

If the equipment is leased, the cost for 5 years would be $8,750 per year (due at the beginning of each year), totaling $43,750.

If the equipment is purchased, the initial cost would be $65,000, and additional costs would include insurance and maintenance costs of $1,000 per year for 5 years, totaling $5,000. The salvage value of the equipment after 5 years is expected to be $3,000.

To calculate the NAL, we need to find the present value of the lease payments and the net present value of purchasing the equipment. We use the after-tax interest rate and the company's marginal tax rate to discount the cash flows.

By calculating the present value of both the lease and purchase options, we can then subtract the purchase cost from the present value of the lease payments to find the Net Advantage of Lease (NAL).