Question: You have to make a decision either to buy or to rent the equipment for your restaurant. Purchase cost would be $30,000. Of this amount, $7,500 would be paid in cash now, and the balance would be owed to the equipment supplier. The owner agrees to accept $4,500 a year for 5 years as payment toward the principal, plus interest at 11%. The equipment will have a 5-year life and a residual value of $4,000. The residual value can be recovered by trade-in or selling the equipment. Straight-line depreciation basis will be used over the 5 years. Alternatively, the equipment can be rented for the 5 years at a rental cost of $7,000 a year. Assume a 28% income tax rate. Discount rate to be used is 11%.
a. Using discounted cash flow, which would be the better investment?
b. What other factors might you want to consider that would change your decision?