Lease-buy Analysis Kellogg Hotel is about to acquire a new audio system for Big Ten Room that costs $300,000. It has also been offered an opportunity to lease the machine for payments of $45,000 per year payable at year-end, over six years. The machine is depreciable for tax purposes over six years using the straight-line method with zero residual value.

The lease contains a purchase option at its end at a fair market value which is estimated to be $50,000. It also stipulates that Kellogg will be responsible for paying for maintenance, taxes, and insurance. Kelloggs marginal tax rate is 40%.

Conduct a lease/buy analysis to determine which option is preferable from a purely financial point of view. Use the discount rate of 8%.

PLEASE SHOW YOUR WORK