Explore BrainMass
Share

Net Advantage to Lease (NAL)

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Buster's Beverages is negotiating a lease on a new piece of equipment that would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?

© BrainMass Inc. brainmass.com October 25, 2018, 2:48 am ad1c9bdddf
https://brainmass.com/economics/contracts/net-advantage-to-lease-nal-315876

Solution Summary

The solution explains how to calculate the NAL in an attached Excel document.

$2.19
See Also This Related BrainMass Solution

Net advantage to leasing

Redstone Corporation is considering a leasing arrangement to finance some special manufacturing tools that it needs for production during the next three years. A planned change in the firm's production technology will make the tools obsolete after 3 years. The firm will depreciate the cost of the tools on a straight-line basis. The firm can borrow $4,800,000, the purchase price, at 10 percent on a simple interest loan to buy the tools, or it can make three equal end-of-year lease payments of $2,100,000. The firm's tax rate is 40 percent. Annual maintenance costs associated with ownership are estimated at $240,000.

What is the net advantage to leasing (NAL)?

View Full Posting Details