A farmer is trying to decide whether to lease or purchase a $100.000 tractor she plans to use for 7 years. Tables 1 and 2 show the costs associated with each option If she leases, the annual payment is $18,500 and there is no down payment Alternatively, she can purchase the tractor at the following loan terms: 25% down, 9% interest rate, with annual payments of $16.719 3 Other relevant info the farmer uses a 10% discount rate, and is in the 30% tax bracket (30% of tax deductible expenses come back as tax credit). Business expenses (rent, lease payments) are ta deductible. Interest and depreciation are also tax deductible. Tax credits are accounted for in the year following the year they are accrued because they can be paid in the year following the year they are accrued (2019 taxes are paid in 2020). If the farmer purchases the tractor, she can sell it for $4,000 at the . . .. .. a 8 Table LEASE Year D = o TYT TCTTTTT Rent Tax Credit Cox tax effect (sum 0 $ 18.500 $ - $ 18.500 $18,500 $ 5550 $ (12.950) 2 $(18500 $ (12.950) 3 $ 18,500 $ 12.950 4 $ 18.500 $ (12.950 5 $ 18.500) $ 12.9501 6 $118.500 $ 112.950 7 $ - $ 5.550 20 Table 2 PURCHASE Loan Loan TO Balance Payment Principal O eciation $ 100.000 $ 75,000 $ 65,031 $ $ - 16.750 22 Year 23 24 1 25 2 26 3 27 4 28 5 29 6 30 7 31 $125.000) $ 25.000 $ (16.719 $ 19,969 $ (16,719) $ 16.719 $ 16.719 $ (16,719) $ 16,719) $ - $ - $ - $ - $ $ $ $ $ $ S $ (10.710 19.130 (15.030 12.250 12.250 (12.250 (12.250 (6.130 Pesidual Value $ - $ $ - $ - $ . $ - $ - $ 4.000 Tax 1 Return Create $ - $125.000 $ 7.764 $ 13,506) $ (8.955 $ (10.454 $ 1115821 $ 11,907) $ (12,250 $ 8,089 $ 1839 - $ $ 8 $ - 33 1. Should the farmer lease or purchase the tractor? How can you tell? (Hint: remember TVM) *%98%8889 36 2. How do you think risk should be incorporated into the decision, if at all