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. Assume that the following facts apply:
1. The machinery falls into the MACRS 3-year class.
2. Under either the lease or 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 4 years.
6. Assume that Big Sky Mining has no use for the machine beyond the expiration of the lease. The lease has an estimated residual value of $250,000 at the end of the 4th year.