Lease versus purchase JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 26% tax bracket, and its after-tax cost of debt is currently 10%. The terms of the lease and of the purchase are as follows: Lease Annual end-of-year lease payments of $25,000 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 $3,000 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 research equipment, costing $60,000, can be financed entirely with a 13% loan requiring annual end-of-year payments of $25,411 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-year recovery period. (See for the applicable depreciation percentages.) The firm will pay $1,800 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. The after-tax cash outflow associated with the lease in year 1 is $ (Round to the nearest dollar.) 3 years 5 years 7 years 10 years Recovery year 1 33% 45% 15% 7% 20% 32% 19% 12% 12% 5% 4 5 6 14% 25% 18% 12% 9% 9% 9% 4% 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100% 10 11 Totals 100% 100% 100% a. Lease versus purchase JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 26% tax bracket, and its after-tax cost of debt is currently 10%. The terms of the lease and of the purchase are as follows: Lease Annual end-of-year lease payments of $25,000 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 $3,000 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 research equipment, costing $60,000, can be financed entirely with a 13% loan requiring annual end-of-year payments of $25,411 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-year recovery period. (See for the applicable depreciation percentages.) The firm will pay $1,800 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. The after-tax cash outflow associated with the lease in year 1 is $ (Round to the nearest dollar.) 3 years 5 years 7 years 10 years Recovery year 1 33% 45% 15% 7% 20% 32% 19% 12% 12% 5% 4 5 6 14% 25% 18% 12% 9% 9% 9% 4% 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100% 10 11 Totals 100% 100% 100% a
