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Net advantage of Lease

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I need help with this question concerning Kemp Corporation. I appreciate your help.

Problem 1: Kemp Corporation is evaluating whether to lease or purchase equipment.
The equipment will cost $500,000 if purchased, and the entire amount will be financed
by a bank loan at an annual interest rate of 10 %. At the end of 4 years, the company
expects to sell the equipment for $60,000. The equipment falls in the MACRS 3-year class.
The firm's tax rate is 30 %. The lease terms call for payments of $100,000 for 4 years,
payable at the beginning of the year.

MACRS % by year

a. Calculate the cost of purchasing the equipment.

b. Calculate the cost of leasing the equipment.

c. Calculate the NAL. Should the firm purchase or lease the equipment. Why?

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Solution Summary

The solution explains how to determine the NAL

See Also This Related BrainMass Solution

Net Advantage to Leasing; Reverse Splt

A.The financial manager of Time Press Inc. is considering installing a printing machine for $400,000. The machine will be depreciated using straight line method with zero residual value over a period of 4 years. Alternatively, the firm can lease the printing machine with an annual lease payment of $132,000 over 4 years. The corporate tax rate is 40%. Assume the firm can borrow at 10% before taxes.

i) Should the firm buy or lease the printing machine? support your answer with computations
ii) Determine the maximum annual lease payment that the firm will pay to rent the printing machine.
iii) During the board meeting, the CFO made the following statement: "If the tax advantages of leasing were eliminated, leasing would disappear. " How would you respond? Explain.

b. Explain whether you agree with the following claim from the chief executive officer during the board meeting: 'It is a good suggestion to have a reverse split if we wish to raise the share price of the firm.

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