Problem:
Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amotized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. The entire principal is paid at the end of five years.
Requirement:
Question 1: What is the NPV of the purchase alternative?
Question 2: What is the NPV of the leasing alternative?
Note: Provide support for your rationale.