Question: Barclay Polymers needs to acquire a new extruding machine whose purchase price is $600,000. However, the firm could lease the extruder from Primal Leasing Corp. for a 5-year period and make annual payments of $115,000 at the beginning of the year. If the extruder is leased, the Primal Leasing Corp. would pay all maintenance costs and Barclay would have the opportunity to purchase the asset for $130,000 at the beginning of year 5. If Barclay purchases the extruder, then it will be financed with a 5-year loan at an annual rate of 8.75%. Barclay would use the MACRS depreciation method over a 5-year recovery period, would purchase a service contract for $8,000 a year, and would keep the extruder after its recovery period. If the firm pursues the purchase alternatives, then it would secure a maintenance contract at an expected cost of $3,000 annually. The firm is in a 35% tax bracket.
1. Calculate the annual after-tax cash outflow for the leasing alternative.
2. Determine the annual interest and principle payments for the purchase alternative.
3. Determine the annual depreciation deduction for the purchase alternative.
4. Calculate the net present value of both the leasing and the purchase alternatives. Which method should Barclay Polymers use to obtain the extruder?