Ariah cooperation is considering a lease financing facility or a bank loan for the use/purchase of wheel balancing equipment.

Purchase via bank loan option:

Equipment cost of $50,000, with economic life of 4 years, depreciated annually based on

accelerated recovery with annual rates as follows:

Year 1 Year 2 Year 3 Year 4

33% 45% 15% 7%

Ariah are able to obtain a four-year term loan financing at 12% p.a, with interest calculated on yearly reducing balance. Instalment payments are to be made annually. Ariah must maintain the equipment at an annual cost of $3,000 payable at the end of the year. As a requirement, the equipment must be insured, with an annual insurance premium of $1,000 to be paid at the beginning of the year.

Lease financing option:

Lease financing with four equal rental payments of $16,500, payment to be made in advance. Ariah intends to exercise the option to purchase the equipment at the end of the primary lease period for $5,000. Its tax rate is 40%.

Should they lease or borrow to purchase? Determine the Net Advantage to Leasing.

Please do not use excel, and please give the clear steps and formula.