$(19-6)$ Lease versus Buy

Big Sky Mining Company must install $$1\mathrm{.}5$ million of new machinery in its Nevada mine. It can obtain a bank loan for $100\%$ of the purchase price, or it can lease the machinery. Assume that the following facts apply.

$(1)$ The machinery falls into the MACRS $3-$year class.

$(2)$ Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.

$(3)$ The firm's tax rate is $25\%.$

$(4)$ The loan would have an interest rate of $15\%.$ It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year $4.$

$(5)$ The lease terms call for $$400,000$ payments at the end of each of the next $4$ years.

$(6)$ Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $$250,000$ at the end of the $4$ th year.

a$.$ What is the cost of owning?

b$.$ What is the cost of leasing?

c$.$ What is the NAL of the lease?