Lease vs. Buy Decision

A company is evaluating whether to lease or buy an equipment costing $100,000. Leasing requires annual payments of $25,000 for 5 years. If bought, the equipment will be depreciated over 5 years using straight-line depreciation. The company’s tax rate is 40%, and the discount rate is 8%.

Requirements:

1. Calculate the annual depreciation expense if the equipment is bought.
2. Determine the total cost of leasing.
3. Calculate the total cost of buying considering tax savings.
4. Make a recommendation based on the present value of both options.