Lease versus purchase JLB Corporation is attempting to determine weather to lease or purchase research equipment. The firm is in the 27% tax bracket, and its after- tax cost of debt is currently 10%. The terms in the leases and or purchase are as follows.

LEASE-Annual end of year lease payments of $36,200 are required over the 5-year life of the lease. All maintenance cost will be borne by the lease. The lessee will exercise its option to purchase the asset for $26,000 at termination of the lease.

PURCHASE-The research equipment, costing $1300,000, can be financed entirely with a 16% loan requiring end-of-year payments of $39,703 for 5 years. The firm in this case will depreciate the equipment under MACRS using a53-year recovery period. ( See table 4.2 on page 120 for applicable depreciation percentages) The firm will pay $1,000 per year for the service contract that covers all maintenance cost; insurance and other costs will be borne by the firm. The Firm planes to keep the equipment and use it beyond its 5-year recovery period.

a) Calculate the after tax cash outflows associated with each alternative.

b) Calculate the present value of each cash outflow stream, using the after tax cost of debt.

c) Which alternativelease or purchasewould you recommend?

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% 10% 45% 32% 25% 18% 15% 19% 18% 14% 12% 12% 12% 9% 9% 9% 8% 9% 14% 7% 12% 5% = OWN- 796 4% 6% 6% 4% Totals 100% 100% 100% 100% These percentages have been rounded to the nearest whole percent to simplify Print Done 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% 10% 45% 32% 25% 18% 15% 19% 18% 14% 12% 12% 12% 9% 9% 9% 8% 9% 14% 7% 12% 5% = OWN- 796 4% 6% 6% 4% Totals 100% 100% 100% 100% These percentages have been rounded to the nearest whole percent to simplify Print Done