Consider the information presented in the text and take a case for or against the current use of lease financing in
today’s economic climate. Keep in mind long term interest rates, the things we
know about working capital management, a manager’s need to keep WACC low, and
the value of project options in making your argument. You are encouraged to use
outside sources to support your contentions.

Show your source references. When you finish, answer the following question.

Patriot
Welding 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 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 10% and buy the tools, or it can make 3 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%. Annual maintenance costs associated with
ownership are estimated at $240,000, but this cost would be borne by the lessor
if it leases. What is the net advantage to leasing (NAL), in thousands?