Wolfson Corporation has decided to purchase a new machine that costs $4.0 millio

Question

Wolfson Corporation has decided to purchase a new machine that costs $4.0 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax rate is 35 percent. The Sur Bank has offered Wolfson a four-year loan for $4.0 million. The repayment schedule is four yearly principal repayments of $1,000,000 and an interest charge of 8 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of $1,150,000 per year are due at the beginning of each of the four years of the lease.

a. What is the NAL of leasing for Wolfson? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

So, due to negative NAL, leasing is not cheaper.

Working:

Lease versus Buy Year 0 1 2 3 4 After tax lease payment (747,500.00) (747,500.00) (747,500.00) (747,500.00) Lost tax shield on depreciation (462,000.00) (434,000.00) (406,000.00) (378,000.00) Cost of machine 4,000,000.00 Cash flow 3,252,500.00     (1,209,500.00) (1,181,500.00) (1,153,500.00) (378,000.00) Discount rate (After tax borrowing rate) 8*(1-.35) 1.000 0.951 0.951 0.951 0.951                                                                           0.05 Present value 3,252,500.00 (1,149,714.83) (1,123,098.86) (1,096,482.89) (359,315.59) NAL (476,112.17)

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