Carmichael Cleaners needs a new steam finishing machine that costs $100,000.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 $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 $29,000 per year, payable at the beginning of each year.The lease would include maintenance.Due to special circumstances, 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 10%.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: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)

Question

Quizplus · Accepted Answer

The NAL is $5,734. The NAL is the difference between the present value of the after-tax cash flows of leasing and the present value of the after-tax cash flows of purchasing. The present value of the after-tax cash flows of leasing is $78,096. The present value of the after-tax cash flows of purchasing is $72,362. Therefore, the NAL is $5,734.

Carmichael Cleaners Needs a New Steam Finishing Machine That Costs