You have the option to purchase or lease a? five-axis horizontal machining center. Any revenues generated from the operation of the machine will be the same whether it is leased or purchased. Considering the information? given, should you lease or purchase the? machine? Conduct? after-tax analyses of both options. The effective income tax rate is 41?%, the evaluation period is five? years, and the MARR is 8?% per year.? NOTES: (1) Under the Lease? Option, maintenance costs are included in the annual leasing cost.? (2) Leasing costs are paid at the beginning of each year and are tax deductible.? (3) Depreciation deductions cannot be taken on leased equipment.? (4) Deposits are not tax? deductible, and refunds of deposits are not?taxable; however, owing to the difference in timing between payment and? refund, they must be considered in your analysis.
Leasing Option
Annual leasing? cost: ?$47,000
Deposit? (paid at EOY? zero, refunded at EOY? five):?$89,000
Purchasing Option
Purchase? price: ?$323,000 capital to be borrowed at i=6?%, equal annual payments ?(Principalplus+?Interest) for three years
?Depreciation: three? year, MACRS
Annual maintenance? cost: ?$24,000
Resale value at EOY? five: ?$145,000
Calculate the AW value for the Leasing Option and then for Purchased Option.