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# Net Advantage to Leasing Question

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Neighborhood Savings Bank is considering leasing \$100,000 worth of computer equipment.Â A 4 year lease would require payments in advance of \$22,000 per year.Â Â The bank does not currently pay income taxes and does not expect to have to pay income taxes in the foreseeable future.Â Â If the bank purchased the computer equipment, it would depreciate the equipment on a straight-line basis down to an estimated salvage value of \$20,000 at the end of the 4thÂ year.Â Â The bank's cost of secured debt is 14%, and its cost of capital is 20%.Â Calculate the net advantage to leasing.

COST OF OWNING
Equipment Cost \$(100,000)
Loan Amount \$100,000
Interest (year 1-4) \$(14,000) \$(14,000) \$(14,000) \$(14,000)
Repayment of loan (year 4) \$(100,000)
Residual value (year 4) \$(20,000)
Net cash flow (year 1-4) \$(14,000) \$(14,000) \$(14,000) \$(94,000)
PV ownership CF @14% \$(88,158.39)
Cost of Ownership \$88,158.39

COST OF LEASING
Lease payments (year 1-4) \$(22,000) \$(22,000) \$(22,000) \$(22,000)
Net cash flow (year 1-4) \$(22,000) \$(22,000) \$(22,000) \$(22,000)
PV of leasing CF @ 14% \$(64,101.67)
Cost of Leasing \$64,101.67

NAL = Cost of Ownership - Cost of Leasing = \$24,056.72

Is this correct?