A lease is an agreement that allows one party to use another partys property, plant, or equipment. Leases have become an important source for financing fixed assets for businesses and consumers.

In a lease agreement, the uses the leased assets, which are owned by the .

Consider the case of Shoe Building Inc. (SBI):

Shoe Building Inc. (SBI) is considering the purchase of new manufacturing equipment with an after-tax cost of $15,000. (The equipment qualifies for 100% bonus depreciation and $15,000 is the investment amount after bonus depreciation has been applied. Since the equipment has been fully depreciated at the time of purchase, there is no annual depreciation expense.) SBI can take out a four-year $15,000 loan to pay for the equipment at an interest rate of 4.80%. The loan and purchase agreements will also contain the following provisions:

	The annual maintenance expense for the equipment is expected to be $150.
	The corporate tax rate for SBI is 15%.

Based on the preceding information, complete the following tables:

	Value
Annual tax savings from maintenance will be:

	Year 1	Year 2	Year 3	Year 4
Net cash flow

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

-$24,851.00

-$12,881.00

-$15,461.94

$16,191.01

Shoe Building Inc. (SBI) has been offered an operating lease on the same equipment. The four-year lease requires end-of-year payments of $1,200, and the firm will have the option to buy the asset in four years for $7,500. 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. What is the NPV cost of leasing the asset?

-$12,608.60

-$12,173.69

-$2,826.31

-$10,086.88

Should SBI lease or buy the equipment?

Lease

Buy