Problem: Kemp Corporation is evaluating whether to lease or purchase equipment. The equipment will cost $500,000 if purchased, and the entire amount will be financed by a bank loan at an annual interest rate of 10 %. At the end of 4 years, the company expects to sell the equipment for $60,000. The equipment falls in the MACRS 3-year class.
The firm's tax rate is 30 %. The lease terms call for payments of $100,000 for 4 years, payable at the beginning of the year.
MACRS % by year 0.33 0.45 0.15 0.07
Question 1: Calculate the cost of purchasing the equipment.
Question 2: Calculate the cost of leasing the equipment.
Question 3: Calculate the NAL. Should the firm purchase or lease the equipment. Why?