As part of its overall plant modernization and cost reduction program, the management of Tanner-Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was 21% versus a project required return of 11%.

The loom has an invoice price of $300,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at year-end. In the event the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $20,000 per year paid at year-end. The loom falls in the MACRS 5-year class, and Tanner-Woods's marginal federal-plus-state tax rate is 40%. The applicable MACRS rates are 20%, 32%, 19%, 12%, 11%, and 6%.

United Automation Inc., maker of the loom, has offered to lease the loom to Tanner-Woods for $80,000 upon delivery and installation (at t = 0) plus 4 additional annual lease payments of $80,000 to be made at the end of Years 1 through 4. (Note that there are 5 lease payments in total.) The lease agreement includes maintenance servicing. Actually, the loom has an expected life of 10 years, at which time its expected salvage value is zero; however, after 4 years, its market value is expected to equal its book value of $51,000. Tanner-Woods plans to build an entirely new plant in 4 years, so it has no interest in leasing or owning the proposed loom for more than that period.

1. Should the loom be leased or purchased? Do not round intermediate calculations. Round your answers to the nearest dollar. Negative value(s) should be indicated by a minus sign.

   PV cost of owning at 6.00% is $ .

   PV cost of leasing at 6.00% is $ .

2. The salvage value is clearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pretax discount rate is 15%. What would be the effect of a salvage value risk adjustment on the decision? Do not round intermediate calculations. Round your answer to the nearest dollar. Negative value should be indicated by a minus sign.

   PV cost of owning is $ .