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Should the firm buy or lease

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Question - Equipment can be leased at $15000 per year (first payment at end of year) for eight years or purchased at a cost of $100000. A bank has indicated that it would be willing to make the loan of $100000 at a cost of 7%. There is no salvage value. Now assume a marginal tax rate of 25%. Should the firm buy or lease? The PV of the depreciation expense is 85% of the original investment. Assume a 5.25% discount rate after tax.

Lease; PV of Buy option lower than Lease option

Buy; PV of Lease option lower than Buy option

none of them

Lease; PV of Lease option lower than Buy option

Buy; PV of Buy option lower than Lease option

Reference no: EM132944473

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