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8. Buster's Beverages is negotiating a lease on a...

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8. Buster's Beverages is negotiating a lease on a new piece of equipment that would cost $100,000 if purchased. 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 $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $28,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 35% tax bracket, and it could obtain a 3 year simple interest loan, with interest payable at the end of each year, to purchase the equipment at a before-tax cost of 10%, with all loan principle to be repaid at the end of year 3. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?

 

Paper#7116 | Written in 18-Jul-2015

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