(TCO E) Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm has the option to buy these tools. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at interest rate of 10% and buy the tools. The loan payments would be made at the end of each year. If it decides to lease or it can make three equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan with interest paid at the end of the year. The firm’s tax rate is 40%. The Total Cash Outflows from the Cost of Purchase are the following: (Year 1) +208; (Year 2) +208; (Year 3) -4,592; all occurring at the end of respective years. Calculate the leasing cash outflows, and compare the present values. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete three zeros from dollars and work in thousands.)
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