Lease versus purchase 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 $32000 are required over the 3-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.

Purchase The research equipment, costing $75,000, can be financed entirely with a 15% loan requiring annual end-of-year payments of $32848for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. 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 3-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?