Using excel

Recovery Centers of America needs to acquire new vehicles that will cost $2.5 million across its six state service area. It plans to use the vehicles for three years, at which time new vehicles will be acquired. The company can obtain a 3.49 percent bank loan to buy the vehicles or it can lease the vehicles for three years. Assume that the following facts apply to the decision:

- The vehicles fall into the five-year class for tax depreciation, so the MACRS allowances are 0.2, 0.32, 0.19, 0.12, 0.11, and 0.06 in Years 1 through 6, respectively.

- Tentative lease terms call for payments of $550,000 at the end of each year.

- The best estimate for the value of the vehicles after three years of wear and tear is $1,350,000.

Tax rate: 28%

Year	Allowance
1	20%
2	32%
3	19%
4	12%
5	11%
6	6%

a. What is the NAL and IRR of the lease?

b. Should the organization buy or lease the equipment?

			Year 0	Year 1	Year 2	Year 3
Cost of owning:
Net purchase price
Depreciation tax savings
Residual value
Tax on residual value
Net cash flow

Cost of leasing:
Lease payment
Tax savings from lease
Net cash flow
Net advantage to leasing:
PV cost of leasing
PV cost of owning	-
	a.	NAL

Before tax cost of Debt (BTCD) 3.49%

After tax cost of Debt (ATCD) 2.51%

Internal rate of return of the lease:
Leasing cash flow
Owning cash flow
Incremental cash flow
		IRR
	b.