Reference no: EM131065235

The A Company has decided to acquire a piece of equipment but has not yet decided to buy or to lease. The lease payment would be $140,105 paid annually at the beginning of each year. The lease is a firm commitment to make four payments. If purchased at a cost of $400,000, the equipment would be financed with debt with annual simply interest rate of 10% and the principal will be paid back full at the end of year 4. In addition, the purchase plan also requires an annual maintenance expenses of $20,000. The company will use a straight-line depreciation schedule over the four-year life of the equipment. At the end of year four, the equipment will be sold for $50,000. Assume the company's tax rate is 40%. Compare the option of buying and leasing to help the company decide which alternative they should choose.