3. The Avionics Flying School is considering buying and installing a new $1,000,000 computerized, state-of-the-art flight simulator. They have access to the required amount of funds from sources at a 6% after-tax opportunity cost. However, Blue Sky Leasing Company has offered Avionics a lease on the same piece of equipment.
Apply the following information using the NPV/NAL (Net Advantage to Leasing) method to determine whether to buy or lease the equipment.
? The equipment is in a 5 year MACRS depreciation class.
? The schedule on 5 year MACRS is: .20; .32; .19; .12; & .11
? Avionics' marginal tax rate is 40%
? Estimated maintenance costs of $50,000 a year are due at the end of each of the 5 years.
- If Avionics buys the equipment, it must pay the maintenance fee, but it also receives the maintenance cost tax saving as a result.
- If Avionics leases the equipment, the lessor will assume all maintenance costs.
? For cash flow and discount calculations, the after-tax interest rate is 6%.
? Lease terms call for $280,000 payments at the end of each year, for a five year period.
? The leasing company has offered Avionics a purchase option at salvage value of the equipment at $71,500.
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Evaluates a Lease vs Buy Decision