Carmichael Cleaners Needs a New Steam Finishing Machine That Costs

Carmichael Cleaners needs a new steam finishing machine that costs $100,000.The company is evaluating whether it should lease or purchase the machine.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 $30,000.A maintenance contract on the equipment would cost $3,000 per year,payable at the beginning of each year.Alternatively,the firm could lease the equipment for 3 years for a lease payment of $29,000 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 10%.If there is a positive Net Advantage to Leasing the firm will lease the equipment.Otherwise,it will buy it.What is the NAL? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333,0.4445,0.1481,and 0.0741. )

A) $5,734
B) $6,023
C) $6,324
D) $6,640
E) $6,972

Correct Answer:

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