Question

Big Sky Mining Company must install $1.5 million of new machinery in its' Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. The lease would qualify as a guidline lease for tax purposes. Also, assume no maintenance charges. Assume that the following facts apply:

Answer 1

Please complete the question.

Answer 2

Cost of borrowing to own: Cash flow: Year 0 = 1,500,000 Year 1= 153,000 Year 2= 225,000 Year 3= 45,000 Year 4= 147,000 NPV @ 9% (15%*(1-0.4)) NPV = 1,031,368.27 Cost of leasing Cash flow: Year 0= 240,000 Year 1= 240,000 Year 2= 240,000 Year 3= 240,000 NPV @ 9% (15%*(1-0.4)) NPV = 847,510.72 NAL = 183,857.55