Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the fabricator for $130,000 per year for seven years. Craxton’s tax rate is 25%. (Assume the fabricator has no residual value at the end of the seven years.)

a. What are the free cash flow consequences of buying the fabricator if the lease is a true tax lease?

b. What are the free cash flow consequences of leasing the fabricator if the lease is a true tax lease?

c. What are the incremental free cash flows of leasing versus buying?

Appendix