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LEASE OR BUY: A firm needs assembly line equipment for a new factory and is deciding if they should lease or buy the equipment. The project is expected to last 5 years, and the firm has a tax rate of 40 percent.
If the firm leases the equipment, it will do so at an annual cost of $1.45 million per year payable at the beginning of each year. The lease will be a tax-oriented lease, including maintenance/service of the equipment.
If the firm buys the equipment, it will cost $6 million. The firm will pay for it by borrowing money from the bank at 8 percent. It will be depreciated with MACRS and in the 3-year asset class. Additionally, the firm will buy a service contract from the manufacturer to cover maintenance/service at a annual rate of $250,000 payable at the beginning of each year. The firm expects to sell the asset at the end of 5 years for $450,000.
Find the net advantage to leasing (NAL), showing all steps.
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