... considering a leasing arrangement. The tools will be obsolete and
worthless after 3 years. The firm will depreciate the cost of the tools on a straightline
basis over their 3-year life. It can borrow $4,800,000, the purchase price, at
10% and buy the tools, or it can make 3 equal end-of-year lease payments of
$1,700,000 each and lease them. The loan obtained from the bank is a 3-year
simple interest (non-amortized) loan, with interest paid at the end each year and the
principal of the loan repaid at the end of Year 3. The firm's tax rate is 40%. What
is the net advantage to leasing (NAL)? Would you Lease or Buy? An example of
this is Problem 19-4 in your text.
Would the analysis differ if the financing of the purchase was an amortized loan?