Reference no: EM131060807
Lease versus Buy
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:
The machinery falls into the MACRS 3-year class.
Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.
The firm's tax rate is 30%.
The loan would have an interest rate of 16%. (Suppose that only interest payments are made at the end of each year and the whole loan will be paid back at the end of year 4.)
The lease terms call for $400,000 payments at the end of each of the next 4 years.
Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $200,000 at the end of the 4th year.
MACRS
Year Allowance Factor
1 0.3333
2 0.4445
3 0.1481
4 0.0741
What is the NAL of the lease? Round your answer to the nearest dollar.
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: 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. The loan would have an interest rate of 16%. What is the NAL of the lease?
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