Leasing costs are paid at the beginning of each year

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Reference no: EM132044688

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 38%, the evaluation period is five years, and the MARR is 9% 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): $82,000

Purchasing Option

Purchase price: $338,000 capital to be borrowed at i=7%, equal annual payments (Principal + Interest) for three years

Depreciation: three year, MACRS

Annual Maintenance cost: $24,000

Resale value at EOY five: $159,000

Reference no: EM132044688

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