Question $3$

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 firm$$s cost of debt is $6\mathrm{.}5$ percent.

a$.$ What are the incremental cash flows?

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

c$.$ Should the firm buy or lease?