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 cash now, and the balance would be owed to the equipment supplier. The owner agrees to accept $4,500 a year for five years as payment toward the principal, plus interest at 10 percent. The equipment will have a five-year life, at the end of which it can be sold for $5,000. Calculate depreciation on a straight-line basis over the five years. Alternatively, the equipment can be rented for the five years at a rental cost of $7,000 a year. Income tax rate is 30 percent. Discount rate is 8 percent.

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?