JLB Corporation is attempting to determine whether to lease or purchase research equipment. the firm is in the 40% tax bracket, and its after tax cost of debits currently 8%. The terms of the lease and of the purchase are as follows:
LEASE: Annual end-of-year lease payment of $25,200 is required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other cost will be borne by the lesse. The lesse will exercise its option to purchase the asset for $5,000 at termination of lease.
PURCHASE: The research equipment, costing $60,000 can be financed entirely with a 14% loan requiring annual end-of-year payments of $25,844 for 3 years. the firm in this case will depreciate the equipment under MARCS using a 3 year recovery period. The firm will pay 1,800 per year for a service contract the covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period.
A. Calculate the after-tax cash outflow associated with each
B. Calculate the present value of each outflow stream, using the after-tax cost of debt.
C. Which Alternative-Lease of Purchase-would you recommend? Why