Reference no: EM132412299

Acme, Inc. has decided to acquire a machine that will be used for five years. Acme's tax rate is 21%. If purchased, the machine has a cost of $50,000 and will be depreciated using three-year MACRS (0.3333, 0.4445, 0.1481, 0.0741). Maintenance costs are $2,100 per year (payable at the beginning of the year). The expected residual value in five years is $15,000. If purchased, the interest rate on the term loan will be 10%. Interest payments will be paid annually and the loan principal (the machine's cost) will be due in full at the end of five years.

Alternatively, the machine can be leased through Quality Leasing Corp (QLC). QLC would need to purchase the machine from the manufacturer at $50,000 and would pay cash. QLC would use the same depreciation schedule. QLC has offered a lease to Acme with five annual payments of $11,100 at the beginning of each year. QLC will provide maintenance and cover the cost of the maintenance (payable at the beginning of the year). QLC's tax rate is 25% and it has a minimum acceptable (required) after-tax return on such leases of 6%.

(a) Calculate the NAL for Acme (the lessee).

(b) Calculate the NAL (NPV of investment) of the lease for QLC (the lessor).

(c) Given your results for part b, would QLC write the lease at the proposed terms?

(d) Recalculate the NAL for both Acme and QLC with a lease payment of $11,400. Would QLC write the lease with this lease payment?

(e) Given that leasing is a zero sum game, what factors explain why the NAL in part (d) above is positive to both the lessee (Acme) and the lessor (QLC)?