Reference no: EM132465520

Please help me understand the following problems.

Witten Entertainment is considering buying a machine that costs $546,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $141,000. The company can issue bonds at an interest rate of 6 percent. The corporate tax rate is 21 percent.

What is the NAL of the lease?

Wolfson Corporation has decided to purchase a new machine that costs $3.6 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 24 percent. The Sur Bank has offered Wolfson a four-year loan for $3.6 million. The repayment schedule is four yearly principal repayments of $900,000 and an interest charge of 7 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1,020,000 per year are due at the beginning of each of the four years of the lease.

a. What is the NAL of leasing for Wolfson?

b. What is the maximum annual lease Wolfson would be willing to pay?