Reference no: EM132524551

Use the following information for the next two problems:

Lester Corporation is determining whether to lease or purchase new equipment. The firm is in the 38% tax bracket, and its after-tax cost of debt is currently 7%. The terms of the lease and the purchase are:

Lease: there are annual end-of-year lease payments of $31,500 which are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor. The lessee will be able to exercise its option to purchase the equipment for $6,000 at the termination of the lease.

Purchase: The equipment which costs $77,000, can be financed entirely with a 12% loan which requires annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $2,000 per year for a service contract that covers maintenance costs.

1. Calculate the present value of the cash outflow for the lease alternative.

2. Calculate the present value of the cash outflow for the purchase alternative.