A lease is an agreement that allows one party to use another party's property, plant, or equipment. Leases have become an important source for

financing fixed assets for businesses and consumers.

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

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 $4\mathrm{.}80\%.$ 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:

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

$-$$$15,461\mathrm{.}94$

$-$$$12,881\mathrm{.}00$

$-$$$24,851\mathrm{.}00$

$$16,191\mathrm{.}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\mathrm{.}60$

$-$$$12,173\mathrm{.}69$

$-$$$10,086\mathrm{.}88$

$-$$$2,826\mathrm{.}31$

Should SBI lease or buy the equipment?

Buy

Lease