Reference no: EM133141738

Question - A company has decided to acquire a new market data and quotation system for its home office.

The equipment costs $1,000,000 and, if it were purchased, they could obtain a term loan for the full purchase price at a 10% interest rate. Although the equipment has a 6-year useful life, it is classified as a special-purpose computer and therefore falls into the MACRS 3-year class. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value is $200,000. However, because real-time display system technology is changing rapidly, the actual residual value is uncertain.

As an alternative to the borrow-and-buy plan, the equipment manufacturer informed them that a leasing company would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. The marginal federal-plus-state tax rate is 25%. Please answer the following questions.

1. What is the present value of owning the equipment?

2. What is the present value of leasing the equipment?