Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%. (Note: MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)

Question1: What is the principal repayment in Year 2?

a. $33,233 b. $0 c. $6,979 d. $10,000

Question2: What is the after-tax interest payment in Year 3?

a. $8,000 b. $2,924 c. $3,656 d. $6,000

Question3: How much is the after-tax salvage value at the end of Year 3 if Carmichael Cleaners buys the machine?

a. $20,964 b. $24,000 c. $30,000 d. $25,482

Question4: Should Carmichael Cleaners buy or lease the machine?

a. Buy, the net advantage to leasing is $5,734 b. Lease, the net advantage to leasing is $5,734 c. Buy, the net advantage to leasing is $4,822 d. Lease, the net advantage to leasing is $4,822