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Question 14. 14.
Waldrop Corporation is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years.  The tools will be obsolete and worthless after 3 years.  The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life.  It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them.  The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year.  The firm’s tax rate is 40%.  Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases.  What is the net advantage to leasing (NAL), in thousands?  (Suggestion: Delete 3 zeros from dollars and work in thousands.)
(Points : 20)
      
      

 

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