Assume that a company is choosing between two alternativeslease a piece of equipment for five years or buy a piece of equipment and sell it in five years. The costs associated with the two alternatives are summarized as follows:

	Lease	Buy
Purchase cost of equipment		$ 60,000
Annual operating costs		$ 6,000
Immediate deposit	$ 25,000
Annual lease payments	$ 18,000
Salvage value (5 years from now)		$ 8,000

Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.

If the company chooses the lease option, it will have to pay an immediate deposit of $25,000 to cover any future damages to the equipment. The deposit is refundable at the end of the lease term. The annual lease payments are made at the end of each year. Based on a net present value analysis with a discount rate of 14%, what is the financial advantage (disadvantage) of buying the equipment rather than leasing it?

Multiple Choice

$(2,137)

$(3,457)

$(2,627)

$353