A company is looking to add an new machinery. It will cost $5,000,000 if purchased; It would be depreciated straight-line to zero salvage over 5 years. Alternatively, it may be leased for $600,000 per year. The firm’s cost of debt is 6%, and its tax rate is 40%.
Questions:
a) What’s the lease cash flow?
b) What is the net advantage to leasing (NAL) for the following project?
b) What decision should be made?