Final answer:
The Net Advantage of Leasing calculation compares the present value of leasing costs with the present value of buying costs, including purchase price, insurance, maintenance, CCA tax shield, and salvage value.
Step-by-step explanation:
The Net Advantage of Leasing (NAL) is a calculation used to decide whether a company should lease or buy equipment. In this case, we need to compare the cost of leasing equipment to the cost of purchasing it over a 6-year period considering the after-tax cost of borrowing, the depreciation tax shield from Capital Cost Allowance (CCA), and ongoing insurance and maintenance costs if the equipment is purchased, as well as the salvage value of the equipment at the end of the term.
If the company leases the equipment, they would pay $11,500 per year for 6 years. When analyzing the option to buy, we must factor in the initial purchase price of $60,000, annual insurance and maintenance costs of $500, the tax benefits from a CCA rate of 21%, and the salvage value of $5,000 at the end of 6 years. To correctly compare the two options, we must calculate the present value of all costs and benefits for each scenario, using the company's after-tax cost of capital of 11% as the discount rate. The option with the higher present value of costs would be less favorable, and hence, the difference between the two present values gives us the NAL.
Ultimately, if the NAL is positive, leasing the equipment is more advantageous financially. However, if the NAL is negative, purchasing the equipment would be a better option. The calculation involves intricate financial modeling including tax impacts, present value calculations, and cash flow analysis to make this determination.