Question $28(35$ marks$)$

Morris$-$Meyer Mining Company must install $$1\mathrm{.}5$ million of new machinery in its Nevada mine. It can obtain a bank loan for $100$ percent of the required amount. Alternatively, a Nevada investment banking firm that represents a group of investors believes that it can arrange for a lease linancing plan. Assume that the following facts apply:

i$.$ The equipment falls in the MACRS $3-$year class.

ii$.$ If it borrows to purchase, then the estimated maintenance expenses are $$75,000$ per year payable at the end of each year.

iii. Morris$-$Meyer's federal$-$plus$-$state tax rate is $40$ percent.

iv$.$ If the money is borrowed, the bank loan will be at a rate of $15$ percent, amortized in $4$ equal installments to be paid at the end of each year.

$v.$ The tentative lease terms call for beginning of year payments of $$400,000$ per year for $4$ years.

vi$.$ Under the proposed lease terms, the lessec must pay for insurance, property taxes, and maintenance.

vii. Morris$-$Meyer will use the equipment for $4$ years at the end of which time it will be sold. The best estimate of this market value is $$250,000.$

viii. $($Note: MACRS rates for Years $1$ to $4$ are $0\mathrm{.}33,0\mathrm{.}45,0\mathrm{.}15$ and $0\mathrm{.}07)$

Required

a$.$ Calculate the net advantage to leasing?