Henk and Ann believe that they can purchase a grain dryer, shed and cleaner for updated costs of $700,000 installed, additionally, Henk and Ann believe that they can purchase storage bins for $800,000. While the Credit Union that Ann talked to gave her some average interest charges, she would like some more information about financing options, additionally Ann has been approached by a financing company to see if Henk and Ann would be interested in leasing the equipment and bins instead of taking out a loan.

Not happy with their current bankers' responses, Ann called FCC to inquire about new loan opportunities and further talked to the financing company. Ann subsequently received the following information.

In a lease-or-buy decision, a 10 year operating lease could be arranged with annual lease payments of $190,000 payable at the beginning of each year. After the lease expires in 10 years the financing company will take the equipment away without any purchase options. Spruce Lawns tax rate is 35%. The machines and equipment have a twenty-year expected life with no residual value expected (Instructors Note: depreciate the equipment using the straight line method over 25 years, not the 10% per year that the case stated). FCC will not require any money down, as such, if purchased, the full $1,500,000 loan would be financed through FCC at a 6% interest rate. The loan calls for equal annual payments to be made at the end of each year for 10 years. Calculate the cash flows for each financing alternative. Which alternative is the most economical.