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Preview: ... l plans to obtain a new MRI that costs \$1.5 million and has an estimated four-year useful life. It can obtain a bank loan for the entire amount and buy the MRI, or it can lease the equip­ment. Assume that the following facts apply to the decision: The MRI falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in years 1 through 4, respectively. Estimated maintenance expenses are \$75,000 payable at the beginning of each year whether the MRI is leased or pur­ chased. Big Sky's marginal tax rate is 40 percent. The bank loan would have an interest rate of 15 percent. If leased, the lease (rental) payments would be \$400,000 payable at the end of each of the next four years. The estimated residual (and salvage) value is \$250,000.   a. What are the NAL and IRR of the lease? Interpret each value.   b.         Assume now that the salvage value estimate is \$300,000, but all other facts remain the same. What is the new NAL? The new IRR? ANSWER Before-tax cost of debt 15% MACRS Tax rate 40% Year 1 Year 2 Year 3 Year 4 After-tax cost of debt 9% 33% 45% 15% 7% a. Here are the net cash flows associated with owning: Year 0 Year 1 Year 2 Year 3 Year 4 Cost of owning: Net purchase price -\$1,500,000 Maintenance cost -\$75,000 -\$75,000 -\$75,000 -\$75,000 Maintenance tax savings \$30,000 \$30,000 \$30,000 \$30,000 Depreciation tax savings \$198,000 \$270,000 \$90,000 \$42,000 Residual value \$250,000 Tax on residual value                                                                      -\$100,000 Net cash flow -\$1,545,000 \$153,000 \$225,000 \$45,000 \$192,000 Depreciation tax savings: Year 1 =C25*E26*-D33 Year 2 =C25*F26*-D33 Year 3 =C25*G26*-D33 Year 4 =C25*H26*-D33 Tax on residual value: =((-D33*(1-E26-F26-G26-H26))-H37)*C25 Here are the net cash flows associated with leasing. We could have recognized that the maintenance expense is nonincremental to the decision and hence could be ignored in the analysis. Cost of leasing: Lease payment -\$400,000 -\$400,000 -\$400,000 -\$400,000 Lease tax savings \$160,000 \$160,000 \$160,000 \$160,000 Maintenance cost -\$75,000 -\$75,000 -\$75,000 -\$75,000 Maintenance tax savings \$30,000 \$30,000 \$30,000 \$30,000 Net ...

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