AAA, Inc. needs some new machines. The machines would cost $200,000 if purchased and would be depreciated straight-line over 5 years. No salvage is expected. Alternatively, the company can lease the equipment for $40,000 per year. The marginal tax rate is 22 percent and the firms cost of debt is 6.5 percent.

a. What are the incremental cash flows?

b. Calculate the net advantage to lease (NAL).

c. Should the firm buy or lease?