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AFM Corporation is considering acquiring a new piece of equipment. The equipment has a cost of 5 0 0 , 0 0 0 and is
AFM Corporation is considering acquiring a new piece of equipment. The equipment has a cost of and is expected to have a year useful life with no salvage value. The company can either purchase the equipment using a bank loan with an interest rate of or enter into a year financial lease agreement. The lease payments are per year, payable at the end of each year. AFM Corporation's tax rate is and it uses straightline depreciation for all its equipment. The company's required return for such investments is
Calculate the Net Advantage of Leasing NAL for AFM Corporation. Assume that if the equipment is purchased, the bank loan payments are made in an annuity fashion at the end of each year.
Determine the annual cash flow from leasing for each year of the lease term.
Requirements:
Detail the annual cash flow from leasing by considering the lease payments, tax savings, and any other relevant cash flows.
Calculate the NAL and, based on the calculated NAL, explain whether AFM Corporation should use purchase the equipment or finical lease.
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