The Barnstormer Corp. needs new equipment that would cost $3.5 million and would fall into the...

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The Barnstormer Corp. needs new equipment that would cost $3.5million and would fall into the MACRS 5-year class for depreciationpurposes. Maintenance would be $160,000 per year, payable at thebeginning of each year, if they buy the equipment themselves. Theycould borrow at a 9% rate of interest, before tax, if they were tobuy the equipment directly. They plan on using the equipment for 5years before it will need to be replaced with something moremodern. The estimated residual value of the equipment in five yearsis $750,000.
Barnstormer has found a leasing company that would be willing tolease the equipment to them for 5 years for $570,000 per year,payable at the beginning of the year. Maintenance would be includedin the lease payment. Barnstormer is in the 30% marginal taxbracket.
1. Should Barnstormer lease the equipment or buy the equipment?Explain.
2. What is the NPV of the lease to the leasing company if theyhave a borrowing rate of 6% and a tax rate of 45%

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1 a Below table shows the tax benefit every year from depreciation and interest if we purchase the equipment Year Depreciation rate using MACRS Depreciation amount Interest payment Total Depr Interest Tax benefit 1 20 700000 315000 1015000 304500 2 32 1120000 315000 1435000 430500 3 1920 See Answer

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The Barnstormer Corp. needs new equipment that would cost $3.5million and would fall into the MACRS 5-year class for depreciationpurposes. Maintenance would be $160,000 per year, payable at thebeginning of each year, if they buy the equipment themselves. Theycould borrow at a 9% rate of interest, before tax, if they were tobuy the equipment directly. They plan on using the equipment for 5years before it will need to be replaced with something moremodern. The estimated residual value of the equipment in five yearsis $750,000.Barnstormer has found a leasing company that would be willing tolease the equipment to them for 5 years for $570,000 per year,payable at the beginning of the year. Maintenance would be includedin the lease payment. Barnstormer is in the 30% marginal taxbracket.1. Should Barnstormer lease the equipment or buy the equipment?Explain.2. What is the NPV of the lease to the leasing company if theyhave a borrowing rate of 6% and a tax rate of 45%