Question
JLB Corporation is attempting to determine whether to lease or purchase research equipment. the firm is in the 27% tax bracket, and its after tax
JLB Corporation is attempting to determine whether to lease or purchase research equipment. the firm is in the 27% tax bracket, and its after tax cost of debtis currently 8%. the terms of the lease and of the purchase are as follows:
LEASE: Annual end-of-year lease payment of $25,200 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor;insurance and other cost will be borne by the lesse. the lesse will excercise its option to purchase the asset for $7,000 at termination of 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 research equipment, costing $80,000 can be financed entirely with a 15% loan requiring annual end-of-year payments of $35,038 for 3 years. the firm in this case will depreciate the equipment under MARCS using a 3 year recovery period. (see the chart for applicable depreciation percentages).The firm will pay 2000 per year for a service contract the 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 3-year recovery period.
A. Calculate the after-tax cash outflow 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 outflow stream,using the after-tax cost of debt.
C. Which Alternative-Lease of Purchase would you recommend? Why?
Data table Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery yeara Recovery 3 years 5 years 7 years 10 years year 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 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100% These 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. 9% Print DoneStep by Step Solution
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