Redstone Corporation is considering a leasing arrangement to finance some special manufacturing tools that it needs for production during the next three years. A planned change in the firm's production technology will make the tools obsolete after 3 years. The firm will depreciate the cost of the tools on a straight-line basis. The firm can borrow $4,800,000, the purchase price, at 10 percent on a simple interest loan to buy the tools, or it can make three equal end-of-year lease payments of $2,100,000. The firm's tax rate is 40 percent. Annual maintenance costs associated with ownership are estimated at $240,000.
What is the net advantage to leasing (NAL)?
a. $ 0
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The solution explains how to calculate the net advantage to leasing (NAL).