The Ortega Resort has decided to acquire a new fairway mower. One alternative is to lease the mower for 5 years making lease payments at the beginning of each year of $8,000. Maintenance would be covered by the lessor. Alternatively, Ortega could buy the mower for $30,000 (all borrowed funds) and amortizing the loan over a 5-year period at a 10% interest rate, assume 5 annual payments. The estimated annual maintenance cost to Ortega would be

$2,000. The mower is expected to have a salvage value (after the 5th year) of

$8,000. Assume the mower will be depreciated using the S.L. method over its 5-year life. Ortega has a marginal tax rate of 30%. All cash flows should be discounted using 10%. Assume the lease mower cannot be purchased at the end of the lease.

Required:

1. What is Ortega’s present value of leasing?

2. What is Ortega’s present value of owning?

3. Which do you recommend?