Lease or buy?
Reynolds Construction needs a piece of equipment that costs $350. Reynolds either can lease the equipment or borrow $350 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Assume that Reynolds's tax rate is 40% and the equipment's depreciation would be $175 per year. If the company leased the asset on a 2-year lease, the payment would be $192.5 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should Reynolds lease or buy the equipment?
A. Lease
B. Buy