Bev's Beverages is negotiating a lease on a new piece of equipment that would cost $87,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $33,000. A maintenance contract on the equipment would cost $2,700 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $20,200 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 8.3%.
If there is a positive Net Advantage to Leasing, then the firm will lease the equipment. Otherwise, the firm will buy it. What is the NAL? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)Do not round your intermediate calculations.
A. $10,365
B. $10,884
C. $8,811
D. $7,774
E. $9,847
Answer: A
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