Allied Constructions Limited is considering entering into a lease agreement that contains the following information for a new machine:
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Lease payment (in advance) = $120,000 per year
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Lease term = 5 years
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Purchase cost = $500,000
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Depreciation per year = 20% of purchase cost
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Residual value = $50,000
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Salvage value = $20,000
The relevant tax rate is 35%. Tax savings on the lease will be recorded in the same year as the lease payments.The company's before tax cost of debt is8% per annum. Calculate the incremental NPV of the lease agreement and ascertain if the company should take out the lease.