Lease VS. Buy
Trasky Company is trying to decide whether it should purchase or lease a new automated machine to be used in the production of a new product. If purchase, the new machine, the new machine would cost $100,000 and would be used for 10 years. The salvage value at the end of ten years is estimated at $20,000. The machine would be depreciated using MACRS over a seven year period. The annual maintenance and operating costs would be $20,000. Annual revenues are estimated at $55,000.
If the machine is leased, the company would need to pay annual payments of $20,700. The first lease payment and a deposit of $5,000 are due immediately. The lease payment is paid at the beginning of year 10. The deposit is refundable at the end of the tenth year. In additional, under a normal contract, the company must pay for all maintenance and operating cost, although the leasing company does offer a service contract that will provide annual maintenance (on leased machines only). The contract must be paid up front and cost $30,000. Trasky estimates that the contract will reduce its annual maintenance and operating costs by $10,000. Trasky