Anderson plans to acquire automated assembly line equipment with a 10-year life at a cost of $10 million, delivered and installed. However, Anderson plans to use the equipment for only 5 years and then discontinue the product line. Anderson can borrow the required $10 million at a pre-tax cost of 10%. We will assume that the loan is non-amortizing, that is, interest-only, as if Anderson had issued bonds to pay for the equipment. We could analyze an amortizing loan but the after-tax interest calculations would be more complicated. The equipments estimated scrap value is $50,000 after 10 years of use, but its estimated residual value after only 5 years of use is $2,000,000. Thus, if Anderson buys the equipment, it would expect to receive $2,000,000 before taxes when the equipment is sold in 5 years.

Anderson can lease the equipment for 5 years for an annual rental charge of $2,600,000, payable at the beginning of each year, but the lessor will own the equipment upon the expiration of the lease. (The lease payment schedule is established by the potential lessor, as described in the next section, and Anderson can accept it, reject it, or negotiate modifications.) The lease contract stipulates that the lessor will maintain the equipment at no additional charge to Anderson. However, if Anderson borrows and buys, it will have to bear the cost of maintenance, which will be done by the equipment manufacturer at a fixed contract rate of $500,000 per year, payable at the beginning of each year. The equipment falls in the MACRS 5-year class, Andersons marginal tax rate is 25%, and the lease qualifies as a guideline lease. Build a similar model to what we did in class to make the decision. Submit by uploading your excel file.