Bev's Beverages is negotiating a lease on a new piece of equipment that would cost $80,000 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 $25,000.A maintenance contract on the equipment would cost $2,500 per year,payable at the beginning of each year.Alternatively,the firm could lease the equipment for 3 years for a lease payment of $23,000 per year,payable at the beginning of each year.The lease would include maintenance.The firm is in the 20% 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? (Note: MACRS rates for Years 1 to 4 are 0.33,0.45,0.15,and 0.07.)

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The NAL is $2,852. The calculation is as follows:**Year 0*** Purchase cost: -$80,000* Loan proceeds: $80,000**Year 1*** Depreciation: -$26,400 (0.33 * $80,000)* Maintenance: -$2,500* Interest: -$6,400 (0.08 * $80,000)* Tax savings: $10,560 (0.20 * $26,400)* Net cash flow: -$18,840**Year 2*** Depreciation: -$36,000 (0.45 * $80,000)* Maintenance: -$2,500* Interest: -$6,400 (0.08 * $80,000)* Tax savings: $14,400 (0.20 * $36,000)* Net cash flow: -$18,500**Year 3*** Depreciation: -$12,000 (0.15 * $80,000)* Maintenance: -$2,500* Interest: -$6,400 (0.08 * $80,000)* Tax savings: $4,800 (0.20 * $12,000)* Sale of equipment: $25,000* Net cash flow: $11,100**Lease*** Lease payment: -$23,000* Tax savings: $4,600 (0.20 * $23,000)* Net cash flow: -$18,400**NAL*** NAL = Net cash flow (purchase) - Net cash flow (lease)* NAL = -$18,840 - -$18,500 - $11,100 - (-$18,400)* NAL = $2,852

Bev's Beverages Is Negotiating a Lease on a New Piece