Problem 19-4

Lease versus Buy:

Big Sky Mining Company must install $1.5 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 40%.
4. The loan would have an interest rate of 12%. It would be non-amortizing, 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 $300,000 at the end of the 4th year.

MACRS

Years Allowance Factor

1 0.3333

2 0.4445

3 0.1481

4 0.0741

What is the NAL of the lease? Round your answer to the nearest dollar.