A company is evaluating the following lease or buy option.
A four year lease with annual payments of $25,000 payable at the beginning of the year.The tax shield is available at the end of the year. The company's tax rate is 25% and company's cost of capital is 12%.
The machine costs $85,000 has a four year useful life with no residual value.If financed the asset would be financed through a term loan at 10%. The loan calls for equal payments to be made at the end of each year for four years.The machine would qualify for accelerated capital cost allowance written off on a straight line basis over two years.
Calculate the cash flows for each alternative. Which alternative is the most attractive?