Lease versus purchase Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $70,000. The machine can be leased or purchased. The firm is in the 24% 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 $17,800 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 $24,000 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 $70,000 will be financed with a five-year, 14% loan requiring equal end-of-year payments of $20,390. The machine will be depreciated under MACRS using a 5-year recovery period. (See for the applicable depreciation percentages.) The firm will pay $3,000 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 five-year recovery period. Data Table a. Determine the after-tax cash outflows of Northwest Lumber under each alternative b. Find the present value of each stream, using the after-tax cost of debt. c. Which alternative-lease or purchase-would you recommend? Rounded Depreciation Percentages by Recovery Year Using a. The after-tax cash outflow associated with the lease in years 1 through 4 is $. (Round to the nearest dollar.) MACRS for First Four Property Classes The after-tax cash outflow associated with the lease in year 5 is $(Round to the nearest dollar.) Percentage by recovery year Recovery 3 years 5 years The after-tax cash outflow associated with the purchase in year 1 is $. (Round to the nearest dollar.) year 33% 20% 14% 10% The after-tax cash outflow associated with the purchase in year 2 is $ . (Round to the nearest dollar.) 45% 32% 25% 18% 3 15% 19% 18% 14% The after-tax cash outflow associated with the purchase in year 3 is $ (Round to the nearest dollar.) 7% 12% 12% 12% 12% 9% 9% 5% 9% 8% Click to select your answer(s). 9% 7% 8 4% 6% 6% 10 6% 7 years 10 years 1 2 4 5 6 7 9