Baker manufacturing needs a new machine that costs $200,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $70,000.
A maintenance contract on the equipment would cost $6,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $59,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 21% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 8%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?
MACRS RATES (year 1 0.3333) (year 2 0.4445) (year 3 0.1481) (year 4 0.0741)
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