Bev’s Beverages is negotiating a lease

Bev’s Beverages is negotiating a lease

Bev’s Beverages is negotiating a lease on a new piece of equipment that would cost $80,000 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 $25,000.  A maintenance contract on the equipment would cost $2,500 per year, payable at the beginning of each year.  Alternatively, the firm could lease the equipment for 3 years for a lease payment of $23,600 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 8%.  If there is a positive Net Advantage to Leasing the firm will lease the equipment.  Otherwise, it will buy it.  What is the NAL?  (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)

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Answer

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[removed]$1,332
[removed]$1,497
[removed]$1,482
[removed]$1,257

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