Dwyer Corporation is determining whether to lease or purchase new equipment. The firm is in the $38\%$ tax bracket, and its after$-$tax cost of debt is currently $7\%.$ The terms of the lease and the purchase are:

Lease: Annual end$-$of$-$year lease payments of $$31,500$ are required over the $3-$year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the equipment for $$6,000$ at the termination of the lease.

Purchase: The equipment, costing $$77,000,$ can be financed entirely with a $12\%$ loan requiring annual end$-$of$-$year payments of $$32,059$ for $3$ years. The firm will depreciate the equipment under MACRS using a $3-$year recovery period $(33\%$ in year $1,45\%$ in year $2,15\%$ in year $3$ and $7\%$ in year $4).$ The firm will pay $$2,000$ per year for a service contract that covers maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its $3-$year recovery period.

Calculate the present value of the cash outflow for both the lease and purchasing and recommend one alternative.

Question $9$ options:

A$.$ The present value of the cash outflow for the lease is $$64,590$ and for purchasing is $$65,398,$ therefore Dwyer should choose the lease.

B$.$ The present value of the cash outflow for the lease is $$51,178$ and for purchasing is $$51,703,$ therefore Dwyer should choose the lease.

C$.$ The present value of the cash outflow for the lease is $$56,151$ and for purchasing is $$56,775,$ therefore Dwyer should choose purchase.

D$.$ The present value of the cash outflow for the lease is $$56,151$ and for purchasing is $$56,775,$ therefore Dwyer should choose the lease.