Better Corp. has decided to purchase a new machine that costs $3.6 million. The machine will be depreciated on a straight-line basis and can be sold for $500,000 before tax after four years. The corporate tax rate is 30 percent. The Sun Bank has offered Better a four-year loan for $3.6 million. The repayment schedule is four yearly principle repayments of $900,000 and an interest charge of 9 percent on the outstanding balance of the loan at the beginning of each year. Both principle repayments and interest are due at the end of each year. Can Do Leasing Corporation offers to lease the same machine to Better. Lease payments of $950,000 per year are due at the beginning of each of the four years of the lease.
a. What is the cost to Better if it purchased the equipment?
b. What is the cost to Better of leasing the equipment?
c. What is the NAL of leasing to Better?
d. Should Better lease the equipment from a financial perspective?
e. What is the maximum lease payment (pre tax) Better would be willing to pay?