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1) Happy Rock Corporation needs manufacturing tools for production during the next three years. In order to buy the tools, the firm can borrow the purchase price of $4,800,000 at a 10% rate. The purchase price of the tools would be depreciated on a straight-line basis, and annual maintenance costs associated with ownership are estimated to be $240,000. However, a planned change in the firm's production technology will make the tools obsolete after three years, and so Happy Rock is considering a leasing arrangement to finance them instead. Under a lease arrangement, the company can make three equal end-of-year lease payments of $2,100,000, and the lessor will be responsible for annual maintenance expenses. Assume Happy Rock’s marginal tax rate is 40%. What is the net advantage to leasing (NAL) for Happy Rock?

2) What is the maximum lease payment Happy Rock should be willing to pay?

3) Same question as number 1 just with one difference:

...Under a lease arrangement, the company can make three equal BEGINNING-OF-YEAR lease payments of $2,100,000, and the lessor will be responsible for annual maintenance expenses. Assume Happy Rock’s marginal tax rate is 40%. What is the maximum lease payment Happy Rock should be willing to pay?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92748009

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