Problem:

Andiola Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. If the company purchases the equipment for $1,500,000 it will depreciate it over 5 years, using straight-line depreciation. If the company enters into a 5-year lease, the lease payment is $350,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 10 percent.

Required:

Question 1: Calculate the cost of purchasing the equipment.

Question 2: Calculate the cost of leasing the equipment.

Question 3: Calculate the net advantage to leasing. Should the company purchase or lease the equipment? Please provide all calculations and formulas.