Because of the heavy repair costs, management wants to replace current machinery with now equipment. The equipment can be leased or bought. Terms of the lease are $500/month for 7 years with a $1 bargain purchase option at the end of the term. A new machine would cost $240,000, but last an estimated 10 years (which is equal to the AMT life). The bookkeeper has prepared an analysis of whether to buy or lease, and concluded that buying is cheaper. Review the analysis below. Do you concur with the bookkeepers analysis? (Assume a 10% cost of capital in your calculations.)

Purchase of Equipment

Purchase price $240,000

Less tax deductions:

2014 Section 179 24,000

2014 Depreciation 240,000

x .1429

34,298

58,296

Times: tax rate X 35%

Yearly tax effects (20,404)

Times: 10 yr life

Total tax payback (204.036)

Net cost of equipment - $35,964

Lease of Equipment

Monthly cost 2,000

Times: 12 months/year X12

Yearly cost 24,000 24,000

Times: tax rate X35%

Yearly tax effects (8,400)

Net yearly cost 15,600

Times: 10 yr life

Net cost of equipment 156,000

Cost of Lease 156,000

Less: Cost of Purchase (35.964)

Net savings - purchase 120,036

NOTE: PLS provide calculations for the answer (Assume a 10% cost of capital in your calculations.)