Question
Emory Printing needs a new high-speed printing press. It can purchase one for $50,000 in cash. The machine will last 5 years, and it will
Emory Printing needs a new high-speed printing press. It can purchase one for $50,000 in cash. The machine will last 5 years, and it will be depreciated for tax purposes using straight-line depreciation over that period. This means that Emory can deduct $10,000 per year for depreciation. The corporate tax rate is 35%. Alternatively, Emory can lease the machine instead of purchasing it. A five-year lease will cost 11,800 per year. Emory must make these payments at the beginning of each year. Emory can deduct the lease payments as an operating expense when they are paid. The lease contract does not provide for maintenance or servicing so these cost are identical whether the machine is leased or purchased. Emorys unlevered cost of capital is 12% and its borrowing cost is 8%. Required:
(a) What will be your recommendation? Lease or borrow to buy the equipment. Support your answer with relevant calculation.
(b) If the lease is a non-tax lease would your answer above be different. Support your answer with relevant calculation.
(c) Would it be appropriate to consider buying compared to leasing rather than the option above i.e. borrowing to buy compared to leasing?
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