Adel runs a construction equipment rental company, renting out loaders, generators, lifts and similar equipment on short term rentals. In the past, Adel has purchased the equipment he then rents out, but business is expanding quickly, and so he is considering acquiring equipment via leasing or lease-to-own agreements. He is evaluating a new bulldozer with a list price of $290,000 as a test case.

He can purchase the bulldozer outright. If he does so, then hell need to decide whether or not to overhaul it or sell it after three years. It would sell for $180,000 after three years, or $135,000 after six years. The overhaul would cost $150,000.

Annual operations and maintenance costs will start at $25,000 per year and increase $7,500 each year. These costs are driven by the age of the bulldozer and are not affected by the overhaul. Adel also will spend $9,500 per year on insurance, and 5% of the rental revenues on transporting the bulldozer to and from job sites.

The manufacturer can also do a lease or lease-to-own agreement. In that case, the term is five years with no option to extend it further. The standard lease has an annual payment of $45,000, and the lease-to-own has an annual payment of $42,000, with the balance due at the end of the five year term. Adel would be responsible for the overhaul costs in year three. Adel is quite sure he could negotiate a different term length with the same terms as the five year lease.

Adel expects the bulldozer to bring in $175,000 in revenue in the first year of owning or leasing it. Rental income is expected to increase by $30,000 each year until it reaches a maximum of $300,000, when the bulldozer reaches if full practical utilization.

If Adel can get a loan to purchase the bulldozer at 9% annual interest, which financing plan do you recommend?