ABC is considering leasing a computer system that costs $1 million dollars new. The lease requires annual payment of $180,000 in arrears for 7 years. ABC's tax rate is 40%. If it purchased the computer system, it could depreciate it to its residual value over 7 years. ABC's cost of debt and WACC are 8% and 12% respectively.
a. Calculate the NAL assuming a ZERO residual value. Should ABC lease?
b. Calculate the NAL assuming a $350,000 residual value. Should ABC lease?