The Carver Paper Company has decided to acquire a $300,000 pulp quality control Machine that has a useful life of 10 years. A salvage value of $50,000 is expected at the end of year 10. The machine would be depreciable on the straight line basis with no salvage value for purposes of depreciation. There is no investment tax credit available.
The company is trying to determine whether it is better to purchase or lease the machine. If purchased the acquisition would be financed with the loan the interest rate would be 10% and that would be due at the end of each year for the 10 year loan. The annual loan payment includes both principal and interest.
If a lease is chosen 10 lease payments would be required at the end of each year. The first year lease payment would be equal to $33,000 with each annual lease payment there after increased by 7% each year. The lease payments would come from cash on hand. The company will use an operating lease arrangement. The company is in the 34% tax bracket.
What is the present value for these two alternatives? Use a discount rate of 15%. Be sure to fully justify your answer. Use timelines. Provide an amortization schedule. Provide a depreciation schedule. Provide a lease schedule. Provide a buy schedule. Provide a combined buy and lease timeline.
This problem is not concerned with inflows or outflows.