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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