Purchase vs. Lease Decision. Cittin Farms is considering replacing a technologically obsolete and fully depreciated tractor currently used in farming operations. The tractor is in good working order and will last, physically, for at least six years. However, the proposed tractor is so much more efficient that Cittin Farms predicts cost savings of \(\$ 25,000\) a year. The tractor's delivered cost is \(\$ 80,000\). Its technological useful life is six years, although the physical useful life is 15 years. The salvage value of the tractor is \(\$ 10,000\) in six years and zero in 15 years. The 5-year class MACRS depreciation will be used on the new tractor. If the new tractor is acquired, Cittin Farms can sell the old tractor at a capital gain of \(\$ 5,000\).

Cittin Farms requires a minimum of a 14 percent aftertax return on all investments. The income tax rate is 40 percent. If Cittin Farms decides to acquire the new tractor, it has the option of purchasing or leasing the tractor. The distributor will sell the tractor outright for \(\$ 80,000\) delivered cost or will lease the tractor at \(\$ 24,000\) per year for six years. Under the lease, the first payment of \(\$ 24,000\) is due now; and, at the end of six years, the tractor reverts to the distributor.

\section*{Required:}

1. Should Cittin Farms acquire the new tractor? Explain.

2. If Cittin Farms should acquire the new tractor, would the company prefer an outright purchase or a lease? Why?