Fall 019 olnis: V 1 Lease versus purchase JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 22% tax bracket, and its after-tax cost of debt is currently 10% The terms of the lease and of the purchase are as follows Lease Annual end-of-year lease payments of $24,000 are required over the three-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 asset for $3,500 at termination of the lease Ignore any future tax benefit associated with the purchase of the equipment at the end of year 3 under the lease option Purchase the equipment costs 560,000 and can be financed with a 12% loan requiring annual end-of-year payments of $24.981 for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. (See for the applicable depreciation percentages) JLB will pay $2,600 per year for a service contract that covers all maintenance costs, insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its three-year recovery period a. Calculate the after-tax cash outfiows associated with each alternative (Hint. Because insurance and other costs are borne by the firm under both alternatives, those costs can be ignored here) b. Calculate the present value of each stream, using the after tax cost of debt c. Which alternative-loase or purchase-would you recommend? Why? - Data table In the 229 archase LE lebt is current nd-of-year leal will be bome b d with the pur paid by ase, Igna 10 years MACRS TOT FITS FOUT Toperty Crasses Percentage by recovery year Recovery 3 years 5 years 7 years year 1 33% 20% 14% 2 45% 32% 25% 3 15% 19% 18% 4 7% 12% 12% 5 12% 9% 5% 9% 9% 4% NA quipment cog quipment unde ract that cove overy period after-tax cash e ignored her present value tive-lease o 10% 18% 14% 12% 9% 8% three yea NLB will equipm firm unde Oooo 7% 10 11 Totals 6% 6% 6% 4% 100% 100% 100% 100% cash outflow Print Done Ive this