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

23% 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 $34,000are 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 $6,000 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 $80,000 and can be financed with a 14% loan requiring annual end-of-year payments of $34,459

for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. for the applicable depreciation percentages.) JLB will pay $2,200 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 alternativelease or purchasewould you recommend? Why?

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Part 1

a.The after-tax cash outflow associated with the lease in year 1 is $26180. (Round to the nearest dollar.)

The after-tax cash outflow associated with the lease in year 2 is $26180. (Round to the nearest dollar.)

The after-tax cash outflow associated with the lease in year 3 is $32180. (Round to the nearest dollar.)

The after-tax cash outflow associated with the purchase in year 1 is $_____ enter your response here. (Round to the nearest dollar.)

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