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:
The machinery falls into the MACRS 3-year class
Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance
The firm’s tax rate is 40%
The loan would have an interest rate of 15%
The lease terms call for $400,000 payments at the end of each of the next 4 years.
Assume that Big Sky Mining has no use for the machine beyond the expiration of the lease. The machine has an estimated residual value of $250,000 at the end of the 4th year.
What is the NAL of the lease?