Consider the case of Mitata Company:

Mitata Company is considering the purchase of new manufacturing equipment with an after-tax cost of $11,250. (The equipment qualifies for 100% bonus depreciation and $11,250 is the investment amount after bonus depreciation has been applied. Since the equipment has been fully depreciated at the time of purchase, there is no annual depreciation expense.) Mitata can take out a four-year $11,250 loan to pay for the equipment at an interest rate of 3.60%. The loan and purchase agreements will also contain the following provisions:

	The annual maintenance expense for the equipment is expected to be $113.
	The corporate tax rate for Mitata is 15%.

Based on the preceding information, complete the following tables:

Value

Annual tax savings from maintenance will be:_________

Net cash flow

Year 1 _______

Year 2 ______

Year 3 ______

Year 4 _______

Thus, the net present value (NPV) cost of owning the asset will be:

$12,118.15

-$9,515.00

-$11,606.52

-$18,584.00

Mitata Company has been offered an operating lease on the same equipment. The four-year lease requires end-of-year payments of $900, and the firm will have the option to buy the asset in four years for $5,625. The firm will want to use the equipment longer than four years, so it plans to exercise this option. All maintenance will be provided by the lessor. What is the NPV cost of leasing the asset?

-$7,825.62

-$2,161.40

-$9,088.60

-$9,782.02

Should Mitata lease or buy the equipment?

Buy

Lease