Principal Components is considering whether to lease or purchase some specialized equipment. The capital budgeting analysis indicating the equipment should be secured already has not been completed. The equipment has a five-year economic and tax life, and the company uses a straight-line depreciation method. The equipment costs $1,000,000 if purchased or it can be leased for five-years at $280,000 per year. The first lease payment is payable in advance. The equipment’s salvage value is estimated to be $100,000. Revenue is expected to be $350,000. Given that the firm has a marginal tax rate of 30% and an after-tax weighted average cost of capital of 10%, A. Determine the net advantage of leasing. B. Should the firm lease or purchase? C. Would the NAL be higher/lower if you used the after-tax cost of debt?

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