Q$3.$ Big Sky Mining Company must install $$1\mathrm{.}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:

$$ The machinery falls in the MACRS $3-$year class

$$ Estimated maintenance expenses are $$75,000$ per year, payable at the beginning of each year

$$ The firm$$s tax rate is $40\%$

$$ The loan would have an interest rate of $15\%$

$$ The lease terms call for $$400,000$ payments at the end of each of the next $4$ years.

$$ Under either case, Big Sky must pay for insurance, property taxes, and maintenance.

$$ Assume that Big Sky Mining will continue to use the machine beyond the expiration of the lease and must purchase it at an estimated residual value of $$250,000$ at the end of the $4$th year.

Compute the incremental after$-$tax cash flows from leasing the asset instead of buying. Which alternative is better?