(18–2)

Lease versus Buy Consider the data in Problem 18-1. Assume that Reynolds’s tax rate is 40% and that the equipment’s depreciation would be $100 per year. If the company leased the asset on a 2-year lease, the payment would be $110 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?

INTERMEDIATE PROBLEMS 3–4