Question $2.($Total marks: $30)$

AFM Corporation is considering acquiring a new piece of

equipment. The equipment has a cost of $500,000$ and is expected

to have a $5-$year useful life with no salvage value. The company

can either purchase the equipment using a bank loan with an

interest rate of $6\%$ or enter into a $5-$year financial lease agreement.

The lease payments are $110,000$ per year, payable at the end of

each year. AFM Corporation's tax rate is $35\%,$ and it uses straightline depreciation for all its equipment. The company's required

return for such investments is $8\%.$

Calculate the Net Advantage of Leasing $($NAL$)$ for AFM Corporation.

Assume that if the equipment is purchased, the bank loan

payments are made in an annuity fashion at the end of each year.

Determine the annual cash flow from leasing for each year of the

lease term.

Requirements:

$1)$ Detail the annual cash flow from leasing by considering the lease

payments, tax savings, and any other relevant cash flows.

$2)$ Calculate the NAL and, based on the calculated NAL, explain

whether AFM Corporation should use purchase the equipment or

finical lease.