Lease versus Buy Big Sky Mining Company must install $1.5 million of new machinery in its Nevada...

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Finance

Lease versus Buy
Big Sky Mining Company must install $1.5 million of newmachinery in its Nevada mine. It can obtain a bank loan for 100% ofthe purchase price, or it can lease the machinery. Assume that thefollowing facts apply:
The machinery falls into the MACRS 3-year class.
Under either the lease or the purchase, Big Sky must pay forinsurance, property taxes, and maintenance.
The firm's tax rate is 30%.
The loan would have an interest rate of 13%. It would benonamortizing, with only interest paid at the end of each year forfour years and the principal repaid at Year 4.
The lease terms call for $400,000 payments at the end of eachof the next 4 years.
Big Sky Mining has no use for the machine beyond the expirationof the lease, and the machine has an estimated residual value of$300,000 at the end of the 4th year.
MACRS
Year Allowance Factor
1 0.3333
2 0.4445
3 0.1481
4 0.0741
What is the NAL of the lease? Round your answer to the nearestdollar.
$

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Transcribed Image Text

Lease versus BuyBig Sky Mining Company must install $1.5 million of newmachinery in its Nevada mine. It can obtain a bank loan for 100% ofthe purchase price, or it can lease the machinery. Assume that thefollowing facts apply:The machinery falls into the MACRS 3-year class.Under either the lease or the purchase, Big Sky must pay forinsurance, property taxes, and maintenance.The firm's tax rate is 30%.The loan would have an interest rate of 13%. It would benonamortizing, with only interest paid at the end of each year forfour years and the principal repaid at Year 4.The lease terms call for $400,000 payments at the end of eachof the next 4 years.Big Sky Mining has no use for the machine beyond the expirationof the lease, and the machine has an estimated residual value of$300,000 at the end of the 4th year.MACRSYearAllowance Factor10.333320.444530.148140.0741What is the NAL of the lease? Round your answer to the nearestdollar.$