As part of its overall plant modernization and cost reduction program, Urban Warehouse & Distribution (Urban W&D)'s management has decided to install a new automated scanning equipment. Urban W&D is evaluating a potential lease for an automated scanning equipment with a 4-year life that costs $40,000 including delivery and installation charges and falls into the MACRS 3-year class.

Buy Option: The funds needed could be borrowed from the bank at a 6% interest rate. If borrowed, Urban W&D would need to pay annaual interest for four years, with payment of the principal amount to be made at the end of the fourth year. In the event that the loom is purchased, Urban W&D will contract to maintain and service it for a fee of $1,000 per year paid at the end of each year. Urban W&D's marginal federal-plus-state tax rate is 25%. The scanning equipment will be used for 4 years, at the end of which time it will be fullyt depreciated but could be sold at an estimated value of $10,000.

Leasing option: Miami Automation Inc., maker of the scanning equipment, has offered to lease the equipment to Urban W&D for a $10,000 lease payment (4 payments total) at the end of each year for four years. The lease agreement includes maintenance and servicing.

Should Urban W&Dlease or buy the loom? Please answer by filling all the cells in yellow in the templates given below.

Summary of Input Data
Invoice Price		$40,000
Length of loan		4
Loan Interest rate		6%
Maintenance expense per year		$1,000
Tax Rate		25%
Lease Payment per year		$10,000
Expected value at the end of fourth year		$10,000
MACRS Class		3 year Class
Discount rate We can now construct our table of incremental cash flows from these two alternatives. Remember, that the appropriate discount rate in this scenario is the after tax cost of borrowing, or: 6%*(1-25%) = 4.5%.		4.50%

Note: You may not need to fill all the item lines. Please fill only the lines that apply to buying option. So, you should understand what item lines apply to buying or leasing.

MACRS 3-year Depreciation Schedule
Year				1	2	3	4
Depr. Rate (Given)				33%	45%	15%	7%
Depr. Exp.				($13,200)