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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 percent. 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 percent. The lease terms call for payments of \$100,000 for 4 years, payable at the beginning of the year.

MACRS % by year 0.33 0.45 0.15 0.07

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?

#### Solution Preview

Before attempting this question, you may vist the following link to get an in depth of understand of information related to the leasing vs buying decision - http://www.agmanager.info/farmmgt/machinery/Lease%20vs.%20Buy.pdf.

For your computation as it relates to the cost of purchasing the equipment, you must note the following at the top of your spreadsheet:

Equipment ...

#### Solution Summary

This solution provides you with a detailed layout in excel of how to approach the question given. Guidance is given as to how to format a table which deals with the costing data and also a table which deals with the leasing data. A link is also provided in the solution which gives an in depth overview of things you need to know when trying to determine whether a firm should lease or buy equipment.

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