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August 1, 2014

Homework Help: Finance - Net Advantage to Leasing

Posted by Dantes on Thursday, October 20, 2011 at 2:48pm.

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

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