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Problem 27-06

A firm wants the use of a machine that costs $110,000. If the firm purchases the equipment, it will depreciate the equipment at the rate of $22,000 a year for four years, at which time the equipment will have a residual value of $22,000. Maintenance will be $3,000 a year. The firm could lease the equipment for four years for an annual lease payment of $29,072. Currently, the firm is in the 40 percent income tax bracket.

Determine the firm's cash inflows and outflows from purchasing the equipment and from leasing. Use a minus sign to enter negative values, if any. If the answer is zero, enter "0". Round your answers to the nearest cent.

Year	0	1	2	3	4
Net cash flows under leasing	$		$		$		$		$
Net cash flows under purchasing	$		$		$		$		$

If the firm uses a 14 percent cost of funds to analyze decisions that involve payments over more than a year, should management lease the equipment or purchase it? Use Appendix B and Appendix D to answer the question. Use a minus sign to enter negative values, if any. Round your answers to the nearest cent.

Present value of net cash flows under leasing: $

Present value of net cash flows under purchasing: $

Management should -Select-leasepurchaseItem 13 the equipment as the present value of the net cash flows under this option is -Select-smallergreaterItem 14 .

If the firm uses a 8 percent cost of funds to analyze decisions that involve payments over more than a year, should management lease the equipment or purchase it? Use Appendix B and Appendix D to answer the question. Use a minus sign to enter negative values, if any. Round your answers to the nearest cent.

Present value of net cash flows under leasing: $

Present value of net cash flows under purchasing: $

Management should -Select-leasepurchaseItem 17 the equipment as the present value of the net cash flows under this option is -Select-smallergreaterItem 18 .