Big Sky Mining Company must install $1.5 million of mew machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Asume that the following facts apply.
1. The machinery falls into he MACRS 3-year class.
2. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes and maintenance.
3. The firm’s tax rate is 40%.
4. The loan would have an interest rate of 15%.
5. The lease terms call for $400,000 payments at the end of each of the next 4 years.
6. Big Sky has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4th year.
What is the NAL of the lease?
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