Compute the best option of lease or buy on the facts given.
Your law office needs a new copying machine, and you are considering two alternatives:
A. Buying a new copying machine: in this case, you will pay today $7,000. The annual expenses (maintenance and insurance) will be $700 and in addition you estimate that the cost per copy will be $0.3. The copying machine life span is 5 years and with straight line depreciation and no terminal value.
B. Lease a copying machine: in this case, you will pay a fix amount of $2,200 a year plus $0.4 per copy.
The law office tax rate is 35% and its discount rate is 8%.
- What is the minimal number of copies for which your law office should buy the machine instead of leasing it?
- How will your answer change if the law office will have an accelerated depreciation of 2 years (meaning each year it can deduct 50% of the machine cost)?