Lease versus purchase Northeast Lamber Company needs to expand its facilities. To do? so, the firm must acquire a machine costing $130,000 .The machine can be leased or purchased. The firm is in the 29% tax? bracket, and its? after-tax cost of debt is 11% .The terms of the lease and purchase plans are as? follows:

Lease The leasing arrangement requires? end-of-year payments of $37,600 over five years. 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 $30,000 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 5 under the lease option.

Purchase If the firm purchases the? machine, its cost of ?$ 130,000 will be financed with a? five-year, 17% loan requiring equal? end-of-year payments of $ 40,633 . The machine will be depreciated under MACRS using a? 5-year recovery period.?

(See

1 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* 3 Recovery year 3 years 5 years 7 years 10 years 4 1 33% 20% 14% 10% 2 45% 32% 25% 18% 6 3 15% 19% 18% 14% 4 7% 12% 12% 12% 8 12% 9% 9% 9 5% 9% 8% 10 9% 7% 11 4% 6% 12 9 6% 13 10 6% 14 11 4% 15 Totals 100% 100% 100% 100% 16a. The afterLax cash outow associated with the lease in years 1 through 11- is $l:|_ {Round to the nearest dollar.)