Health Plan Northwest must install a new $1 million computer to track patient records in its three services areas. It plans to use the computer for only three years at which time a brand new system will be acquired that will handle both billing and patient records. The company can obtain a 10 percent bank loan to buy the computer or it can lease the computer for three years. Assume the following:
• The computer 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.
• The company marginal tax rate is 34 percent
• Tentative lease terms call for payment of $320,000 at the end of each year
• The best estimate for the vale of the computer after three years of wear and tear is $200,000.
1. What are the NAL and IRR of the lease?
2. Assume now that the bank lean would cost 15 percent, but all other facts remain the same. What are the new NAL and IRR?