Reference no: EM132044829
You have the option to purchase or lease a five-axis horizontal machining center. Any revenues generated from the operation of the machine will be the same whether it is leased or purchased. Considering the information given, should you lease or purchase the machine? Conduct after-tax analyses of both options. The effective income tax rate is 40%, the evaluation period is five years, and the MARR is 10% per year.
Notes: (1) Under the Lease Option, maintenance costs are included in the annual leasing cost. (2) Leasing costs are paid at the beginning of each year and are tax deductible. (3) Depreciation deuctions cannot be taken or leased equipment. (4) Depositis are not tax decutbile and refunds of deposits are not taxable; however, owing to the difference in timing between payment and refund, they must be considered in your analysis.
Leasing Option
Annual Leasing cost: $57,000
Deposit (paid at EOY zero, refunded at EOY five): $79,000
Purchasing Option
Purchase price: $380,000 capital to be borrowed at i=9%, equal annual payments (Principal + Interest) for three years
Depreciation: three year, MACRS
Annual Maintenance cost: $19,000
Resale value at EOY five: $137,000
1. Calculate the AW value for the Leasing Option.
2. Calculate the AW value for the Purchasing Option.
3. Based on the AW values, you should (purchase or lease) the machine?