4. The lessee's lease analysis

Consider the case of Mitata Company:

Mitata Company is considering the purchase of new manufacturing equipment that will cost $35,000 (including shipping and installation). Mitata can take out a four-year, $35,000 loan to pay for the equipment at an interest rate of 8.40%. The loan and purchase agreements will also contain the following provisions:

The annual maintenance expense for the equipment is expected to be $350.

The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System's (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively.

The corporate tax rate for Mitata is 40%. (Note: Do not round intermediate calculations.)

Note: Mitata Company is allowed to take a full-year depreciation tax-saving deduction in the first year.

Based on the preceding information, complete the following tables:

Value

QUESTION: Annual loan payment will be: $12,692.22, $10,661.47, $106.61, OR $63,461.12

QUESTION: Annual tax savings from maintenance will be: $154.00, $63.00, $140, OR $294.00

QUESTION: TAX SAVINGS FROM DEPRECIATION:

YEAR 1: $20,999, $6,300, $17,219, OR $4,666

YEAR 2: $13,999, $20,999, $6,223, OR $4,666

YEAR 3: $1,037, $2,073, $6,300, OR $17,219

YEAR 4: $6,300, $20,999, $1,037, OR $17,219

QUESTION: NET CASH FLOW

YEAR 1: -$76,784, $52,213, $9,214, OR -$5,029

YEAR 2: $9,214, $52,213, -$76,784, OR -$3,731

YEAR 3: -$8,163, $9,214, $52,213, OR -$76,784

YEAR 4: -$76,784, $52,213, $9,214, OR -$9,504

QUESTION:

Thus, the net present value (NPV) cost of owning the asset will be:

A. $27,854

B. -$23,020

C. -$22,520

D. -$50,213

Mitata Company has been offered an operating lease on the same equipment. The four-year lease requires end-of-year payments of $1,400, and the firm will have the option to buy the asset in four years for $7,700. The firm will want to use the equipment longer than four years, so it plans to exercise this option. All maintenance will be provided by the lessor.

QUESTION: What is the NPV cost of leasing the asset?

A. -$11,626

B. -$32,714

C. -$2,286

D. -$9,301

QUESTION: Should Mitata lease or buy the equipment?

A. Lease

B. Buy