ABC is considering leasing a computer system that costs $1 million dollars new. The lease requires annual

Question:

ABC is considering leasing a computer system that costs $1 million dollars new. The lease requires annual payment of $180,000 in arrears for 7 years. ABC’s tax rate is 40%. If it purchased the computer system, it could depreciate it to its residual value over 7 years. ABC’s cost of debt and WACC are 8% and 12% respectively.

a. Calculate the NAL assuming a ZERO residual value. Should ABC lease?

b. Calculate the NAL assuming a $350,000 residual value. Should ABC lease?

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...