Martin Scott Electronic (MSE) is considering a leasing arrangement to finance some special machines that it needs for production during the next three years.

A planned change in the companys production technology will make the new machine obsolete after 3 years. MSE will depreciate the new machine on a straight-line basis towards zero salvage value. The firm can borrow the installed cost of $480,000, at 10% interest per annum, calculated on an annual reducing balance, to buy the new machine or make three equal beginning-of-year lease payments of $210,000 should it decide to take up lease financing.

Annual maintenance costs associated with ownership, payable at the end of year, are estimated at $25,000. Annual insurance premium associated with the purchase is estimated to be at $6,000, payment is on a cash-before-cover basis. Should MSE opt for lease financing, all other costs will be borne by the lessor. MSE tax rate is 40%.

What is the net advantage to leasing (NAL)? Which option should MSE select, lease financing or purchase outright via bank borrowing?

1. The annual after-tax cash outflow of the lease option in Year 1, Year 2, and Year 3 is
2. The present value of the after-tax cash outflows of the lease option is
3. The annual loan payment amount of the purchase option in Year 1, Year 2 and Year 3 is
4. The interest expense of the purchase option in Year 1 is
5. The interest expense of the purchase option in Year 2 is
6. The interest expense of the purchase option in Year 3 is
7. The annual maintenance cost associated with the purchase option in Year 1, Year 2, and Year 3 is
8. The annual insurance premium associated with the purchase option in Year 1, Year 2, and Year 3 is
9. The annual depreciation amount associated with the purchase option in Year 1, Year 2 and Year 3 is
10. The total deduction amount for the purchase option eligible for tax shield in Year 0 is
11. The total deduction amount for the purchase option eligible for tax shield in Year 1 is
12. The total deduction amount for the purchase option eligible for tax shield in Year 2 is
13. The total deduction amount for the purchase option eligible for tax shield in Year 3 is
14. The tax shield amount in Year 0 is
15. The tax shield amount in Year 1 is
16. The tax shield amount in Year 2 is
17. The tax shield amount in Year 3 is
18. The after-tax cash outflow associated with the purchase option in Year 0 is
19. The after-tax cash outflow associated with the purchase option in Year 1 is
20. The after-tax cash outflow associated with the purchase option in Year 2 is
21. The after-tax cash outflow associated with the purchase option in Year 3 is
22. The present value of the after-tax cash outflows of the purchase option is
23. The Net Advantage of Leasing (NAL) is
24. Should MSE lease or purchase the special printing machine?