Big Sky Mining Company must install 1.5 million of new machinery it 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 the purchase, Big Sky must pay for insurance, propery taxes, and maintenance.
(3) The firms 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 next 4 years.
(6) 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.
Question: What is the NAL of the lease? (Net Advantage to Leasing)