Maersk is negotiating to lease ten new cargo containers with GE Leasing. The firm has received an offer from BSL Containers for a total purchase price of $1,000,000. The terms of the lease include four payments of $270,000, with each payment occurring at the beginning of the year. An alternative to leasing is to borrow the money and buy the containers. The $1,000,000 amortized term loan for four years has an annual interest rate of 10%. Assume the trucks fall into the MACRS 3-year class and has an expected residual value of $100,000. The applicable depreciation rates are .3333, .4445, .1481 and .0741. Maintenance costs would be included in the lease. If the containers are purchased, a maintenance contract would be bought at the beginning of each year for $15,000 annually. Maersk plans to buy a new fleet of containers at the end of the fourth year. The firm has an effective tax rate of 21%.
a) What is Ace’s present value of the cost of owning?
b) What is Ace’s present value of the cost of leasing?
c) What is Ace’s Net Advantage to Leasing (NAL)?