ABC Industries - Lease Vs. Buy
ABC Company can purchase a $50,000 piece of equipment by putting 25 percent down payment and paying off the balance at 10 percent interest with four annual installments of $11,830. The equipment will be used in your business for eight years, after which it can be sold for scrap for $2,500. The alternative is that it can lease the same equipment for eight years at an annual rent of $8,500, the first payment of which is due on delivery. ABC will be responsible for the equipment's maintenance costs during the lease.
ABC expects that its combined federal and state income tax rate will be 40 percent for the entire period at issue. Its cost of capital is 6 percent (the 10 percent financing rate adjusted by your tax rate).
Please calculate the net cash flows for both lease vs. buying options and suggest which one should ABC go for and why. Assume that depreciation is computed on the basis of the 20 percent declining balance method