Based on the after-tax cash flows

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A construction company is considering whether to lease or buy equipment for its new 4-year project. If they buy the equipment, it will have an initial investment cost of $600,000 with annual costs of $40,000. At the end of the 4 years the equipment can be sold for an estimated $360,000. For tax purposes, the company will use MACRS-ADS depreciation on the equipment. If they decide to lease, it will cost them $220,000 per year all inclusive.? However, they will also be required to make a $150,000 initial deposit that will be refunded in full at the end of the 4-year lease.

The refund is not taxable. The company's marginal effective tax rate is 30% and the capital gain tax rate is 15%. The after-tax MARR is 17% per year. Based on the after-tax cash flows, what would you recommend, leasing or purchase?

Reference no: EM131889938

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