Allied Metals, Inc. is considering leasing $1 millionworth of manufacturing equipment under a lease
Allied Metals, Inc. is considering leasing $1 millionworth of manufacturing equipment under a lease that would requireannual lease payments in arrears forfive years. The net cash flowsto lessee over the term of the lease (with zero residual value) aregiven here. Allied’s cost of secured debt is 12%, and itscost ofcapital is 16%. Allied pays taxes at a 34% marginalrate.Calculate the net advantage to leasing.Should Allied lease, or borrow and buy?Year012345Net cash flow ($000)1,000−300−275−250−225−200
Using formula:NAL = Purchase Price – ? CF/(1+r)t