The Kam Steel Corporation is trying to decide whether to lease or buy a new prod

Question

The Kam Steel Corporation is trying to decide whether to lease or buy a new production equipment. Management has already determined that acquisition of the system has a positive NPV. The system costs $375,000 and qualifies for a 25% CCA rate. The equipment will have a $95,000 salvage value in 5 years. Wildcat's tax rate is 36%, and the firm can borrow at 9%. Southtown Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $35,000 per year. Southtown's policy is to require its lessees to make payments at the start of the year. Based on the given information, what is the NAL for Wildcat?

Explanation / Answer

Cash flows in case cash flow in lease PVF@9% NAL

of Purchase

year 0 -375000 -35000 1 +340000

1 375000*25%*36%=33750 -35000+12600(tax benefit) 0.917 -11350*0.917

2 70313*36% = 25313 -35000+12600 0.842 -2913*0.842   

3 52734*36% = 18984 -35000+12600 0.772 +3416*0.772

4 39551*36% =14238 -35000+12600 0.708 +8162*0.708

5 29663*36%= 10679 +12600 0.650 -1926*0.650

+(95000-88989)*64%=14526 TOTAL +$ 334303

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