F Company wants to install $1.5 million of new machinery in its California mining. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Please calculate NAL (Net Advantage to Leasing) of the leasing. Assume that the following facts apply:
- >The machinery falls into the MACR 3 â€“year class (on the next page).
- >Under either the lease or the purchase, Fin 605 must pay for insurance, property taxes and maintenance.
- >Tax rate is 40%.
- >The loan would have an interest rate of 15%.
- >The lease terms call for $400,000 payments at the end of each of the next 4 years.
- >Assuming Fin 605 has no use of the machinery beyond the expiration of the lease. The machine has an estimated residual value of $250,000 at the end of the 4th year.
MACRSDeprec. Tax Savings
Year Allowance Factor Depreciation Tax rate Ã— (Depreciation)
1 0.33 $495,000 $198,000
2 0.45 675,000 270,000
3 0.15 225,000 90,000
0.07 105,000 2,000