Reference no: EM131896632
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 14%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at 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 $300,000 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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About the lease versus buy
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