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1) Happy Rock Corporation needs manufacturing tools for production during the next three years. In order to buy the tools, the firm can borrow the

1) Happy Rock Corporation needs manufacturing tools for production during the next three years. In order to buy the tools, the firm can borrow the purchase price of $4,800,000 at a 10% rate. The purchase price of the tools would be depreciated on a straight-line basis, and annual maintenance costs associated with ownership are estimated to be $240,000. However, a planned change in the firm's production technology will make the tools obsolete after three years, and so Happy Rock is considering a leasing arrangement to finance them instead. Under a lease arrangement, the company can make three equal end-of-year lease payments of $2,100,000, and the lessor will be responsible for annual maintenance expenses. Assume Happy Rocks marginal tax rate is 40%. What is the net advantage to leasing (NAL) for Happy Rock?

2) What is the maximum lease payment Happy Rock should be willing to pay?

3) Same question as number 1 just with one difference:

...Under a lease arrangement, the company can make three equal BEGINNING-OF-YEAR lease payments of $2,100,000, and the lessor will be responsible for annual maintenance expenses. Assume Happy Rocks marginal tax rate is 40%. What is the maximum lease payment Happy Rock should be willing to pay?

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