Brooklyn Family Medicine, a for-profit group practice, has decided to acquire a new top-of-the-line electrocardiogram (ECG) machine. One alternative would be to purchase the equipment outright for $60,400. If purchased, the practice could borrow the amount needed from a local bank at a 6 percent interest rate. Also, if purchased, the practice would have to sign a maintenance contract with a vendor that would cost $1,600 annually, payable at the beginning of each year. Alternatively, the practice could lease the machine on a four-year guideline lease with a payment of $15,600 payable at the beginning of each year. The lease includes maintenance. The ECG machine falls into the MACRS three-year class (allowances are 33, 45, 15, and 7 percent in Years 1 through 4, respectively), the machine’s estimated residual value is $14,000, and the practice’s federal-plus-state tax rate is 34 percent. In addition, the CEO of Brooklyn Family Medicine believes that the recent election of a new state governor could result in an increase of the practice’s tax rate from 34 percent to 40 percent, but she doesn’t know how this will affect the analysis.
Part a
Should the practice buy or lease the equipment? Please explain and document your answer. Assume a tax rate of 34 percent.