his Lease versus purchase Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $120,000. The machine nie can be leased or purchased. The firm is in the 22% tax bracket, and its after-tax cost of debt is 11%. The terms of the lease and purchase plans are as follows: epi Lease The leasing arrangement requires end-of-year payments of S35,800 over 5 years. All maintenance costs will be paid by the lessor, insurance and other ak costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $20,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option Purchase If the firm purchases the machine, its cost of $120,000 will be financed with a 5-year, 18% loan requiring equal end-of-year payments of $38,373. The machine will be depreciated under MACRS using a 5-year recovery period. (See for the applicable depreciation percentages. The firm will pay $2,000 per ma 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 md beyond its 5-year recovery period. a. Determine the after-tax cash outflows of Northwest Lumber under each alternative. b. Find the present value of each after-tax cash outflow stream, using the after-tax cost of debt. The after-tax cash outflow associated with the lease in year 5 is 47924 (Round to the nearest dollar) The after-tax cash outflow associated with the purchase in year 1 is 5 (Round to the nearest dollar) The after-tax cash outflow associated with the purchase in year 2 is $(Round to the nearest dollar) The stanch with the innen Dithana chase plans are as pssor, insurance an nore any future tax The leasing arrangement will be bome by the lessee. ated with the purchase of the ase If the firm purchases th e will be depreciated under ra service contract that cov its 5-year recovery period. ermine the after-tax cash ou d the present value of each mer-tax cash outflow associa payments of $38.3 The firm will pay $2. ep the equipment ar 1 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year Recovery 3 years 5 years 7 years 10 years year 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 9 6% 10 6% 11 4% ter-tax cash outflow associat 4% 6% ter-tax cash outflow associat ortaya eh nu nenning select your answer(s). Print Done c. Which alternative-lease or purchase-would you recommend? uie alter-tax cost of debt. The after-tax cash outflow associated with the purchase in year 3 is $ (Round to the nearest dollar.) The after-tax cash outflow associated with the purchase in year 4 is $ (Round to the nearest dollar.) The after-tax cash outflow associated with the purchase in year 5 is $(Round to the nearest dollar.) Click to select your answer(s). 323, 302 338, 372X1440 >17,930 md ma a. Determine the after-tax cash outflows of Northwest Lumber under each alternative. b. Find the present value of each after-tax cash outflow stream, using the after-tax cost of debt. c. Which alternative-lease or purchase would you recommend? b. The total present value of the after-tax cash outflows associated with the lease is $ (Round to the nearest The total present value of the after-tax cash outflows associated with the purchase is $ (Round to the nearest C. Which alternative would you recommend? (Select the best answer below.)
