JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the

$25\%$ tax$$bracket$,$ and its$$after$-$tax cost of debt is currently

$9\%.$ The terms of the lease and of the purchase are as$$follows:

Lease$$Annual$$end$-$of$-$year lease payments of $$$

$20,000$ 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 $$$

$5,000$ 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$$The equipment costs $$$

$50,000$ and can be financed with a

$12\%$ loan requiring annual$$end$-$of$-$year payments of $$$

$20,817$ for three years. JLB will depreciate the equipment under MACRS using a$$three$-$year recovery period. $($See

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for the applicable depreciation$$percentages$.)$ JLB will pay $$$

$1,600$ 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 $$after$-$tax cash outflows associated with each alternative.$($Hint$$: 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

$$lease or purchase

$$Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

Percentage by recovery year Superscript a

Recovery year

$3$ years

$5$ years

$7$ years

$10$ years

$1$

$33\%$

$20\%$

$14\%$

$10\%$

$2$

$45\%$

$32\%$

$25\%$

$18\%$

$3$

$15\%$

$19\%$

$18\%$

$14\%$

$4$

$7\%$

$12\%$

$12\%$

$12\%$

$5$

$12\%$

$9\%$

$9\%$

$6$

$5\%$

$9\%$

$8\%$

$7$

$9\%$

$7\%$

$8$

$4\%$

$6\%$

$9$

$6\%$

$10$

$6\%$

$11$

$4\%$

Totals

$100\%$

$100\%$

$100\%$

$100\%$

Superscript aThese percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax$$ purposes, be sure to apply the actual unrounded percentages or directly apply$$ double$-$declining balance depreciation using the$$ half$-$year convention.would you$$recommend$?$Why$?$