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Chapter21 A1. (Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for $1,000,000.
Chapter21 A1. (Net advantage to leasing) Arkansas Instruments (AI) can purchase a sonic cleaner for $1,000,000. The machine has a five-year life and would be depreciated straight line to a $100,000 salvage value. Hibernia Leasing will lease the same machine to AI for five annual $300,000 lease payments paid in arrears (at the end of each year). AI is in the 40% tax bracket. The before-tax cost of borrowing is 10%, and the after-tax cost of capital for the project would be 12%. a. What cash flows does AI realize if it leases the machine instead of buying it? b. What is the net advantage to leasing (NAL)?
