1. Angie and Jack Bearcat need a new combine. They have been offered the opportunity to lease a combine. The terms of the capital lease include a seven-year contract with annual rental payments of $16,000 due at the beginning of each year. Angie and Jack's after tax discount rate is 10% and they are in the 35% tax bracket. There is no purchase agreement at the end of the contract. Thus, Angie and Jack would obtain another lease for a new combine at the end of the lease contract.

Angie and Jack are negotiating with an implement dealer to purchase the same combine. The dealer's lending terms are: 20% down payment; six equal annual, payments and a 7.5% rate of interest. The first loan payment is due at the end of year 1. Depreciation is based on the seven-year class of the MACRS with a shift from 150% declining balance to straight line in the fourth year (table 3-16). The expected market value of the combine in the seventh year is 20% of the initial cost.