Problem $21-14$ Lease or Buy

Wolfson Corporation has decided to purchase a new machine that costs $$2\mathrm{.}5$ million.

The machine will be depreciated on a straight$-$line basis and will be worthless after

four years. The corporate tax rate is $21$ percent. The Sur Bank has offered Wolfson a

four$-$year loan for $$2\mathrm{.}5$ million. The repayment schedule is four yearly principal

repayments of $$625,000$ and an interest charge of $6$ percent on the outstanding

balance of the loan at the beginning of each year. Both principal repayments and interest

are due at the end of each year. Cal Leasing Corporation offers to lease the same

machine to Wolfson. Lease payments of $$725,000$ per year are due at the beginning of

each of the four years of the lease.

a$.$ What is the NAL of leasing for Wolfson? $($A negative answer should be indicated by a

minus sign. Do not round intermediate calculations and enter your answer in

dollars, not millions of dollars, rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.)$

b$.$ What is the maximum annual lease Wolfson would be willing to pay? $($Do not round

intermediate calculations and enter your answer in dollars, not millions of dollars,

rounded to $2$ decimal places, e$.$g$.,1,234,567\mathrm{.}89.)$