Determine the net advantage to leasing

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Reference no: EM133981219

Problem

A medical company is considering purchasing a new MRI (magnetic resonance imaging) machine. The machine costs USD $3,240,000 and has a lifespan of three years. The company has two options: borrow USD $3,240,000 at an interest rate of 6% or lease the machine. If the company chooses to lease, the annual payment will be USD $1,200,000. If the company decides to purchase the machine, it can be fully depreciated over three years using straight-line depreciation. The corporate tax rate for the company is 25%. Get the instant assignment help.

I. Calculate the after-tax lease payment, after-tax cost of borrowing (%), and annual lost depreciation tax shields.

II. Determine the net advantage to leasing (NAL). Based on your calculations, should the company buy or lease the machine?

III. Why do some firms prefer leasing an asset instead of buying it? Provide five reasons to support your answer.

Reference no: EM133981219

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