Super Sonics Entertainment is considering buying a machine that costs $4.5 million. The machine will be depreciated over four years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments $1.35 million per year for four years. Super Sonics is to provide the maintenance expenses of $250,000 per year under either alternative. Assume Super Sonics tax rate is 35%, and it can issue bonds at an 8% interest rate.

What is the NAL associate with leasing the equipment versus borrowing and buying it?

What is the break-even lease rate that is, what lease amount could Super Sonics pay each year and be indifferent between leasing and financing a purchase?

What are the cash flows from the lease from the lessors viewpoint? Assume the lessor has the same cost of debt (8%), and the same tax bracket (35%).

Assume that Super Sonics does not contemplate paying taxes for the next several years. What is the NAL associate with leasing the equipment veresus borrowing and buying it.