Barclay Polymers needs to acquire a new extruding machine whose purchase price is $600,000. However, the firm could lease the extruder for a 5 year period and make annual payments of $115,000 at the beginning of each year. If the extruder is leased, then the leasing company will pay all maintenance costs and Barclay would have the opportunity to purchase the asset for $130,000 at the beginning of year 5. If the exctruder is purchased by Barclay, then it will be financed with a 5 year loan at an annual rate of 8.75%. Barclay would use MACRS depreciation method over the 5 year recovery period, would purchase a service contract for $8,000 per year and would keep the extruder after its recovery period. If the firm pursues the purchase alternative, then it would secure a maintenance contract expected to cost $3,000 annually. The firm is in the 35% tax brakcet.
A) Calculate the annual after-tax out flow for the leasing alternative
B) Determine the annual interest and Principal payments for the purchase alternative
C) Determine the annual depreciation deduction for the purchase alternative
D) Calculate the new present value of both the leasing and purchase alternatives. Which method should Barclay use?