Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for

Question

$1,000,000.

The machine has a five-year life and would be depreciated straight line to a
$100,000 salvage value.

Hibernia Leasing will lease the same machine to AI for five annual
$300,000 lease payments paid in arrears (at the end of each year). AI is in the 40% tax
bracket. The before-tax cost of borrowing is 10%, and the after-tax cost of capital for the
project would be 12%.

a. What cash flows does AI realize if it leases the machine instead of buying it?
b. What is the net advantage to leasing (NAL)?

Answer 1

$106,000

Answer 2

21