. Keystone Corporation is considering a leasing arrangement to finance some spec
ID: 2797493 • Letter: #
Question
. Keystone 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 using 3 year MACRS (33.33%, 44.45%, 14.81%, 7.41%) . 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 payable at the beginning of the year. What is the net advantage to leasing (NAL)?
Explanation / Answer
Cost to borrow - 4800000*3* 0.1= 1440000
Depreciation expense - 800000
Maintainnce - 240000
Total cost in Purchasing - 4800000+1440000+240000
Total Cost in Leasing Cost - 2100000*3 = 6300000
Net advantage to leasing (NAL) - $ 106,200
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