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Lense versus purchase Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $180,000. The machine can be leased or purchased. The firm is in the 30% tax bracket and its after-tax cost of debt is 12%. The terms of the lease and purchase plans are as follows Lease The leasing arrangement requires end-of-year payments of $52.400 over 5 years. Al maintenance costs will be paid by the lessor, insurance and other costs will be borne by the lessee. The lessee wil exercise its option to purchase the asset for $22,000 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 of the firm purchases the machine, its cost of $180,000 will be financed with a 5-year, 16% loan requiring equal end-of-year payments of $54,974. The machine will be deprecated 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 al maintenance costs: insurance and other costs will be bome by the firm. The firm plans to keep the equipment and use it beyond its 5-year recovery period. a. Determine the after-tax cash outflows of Northwest Lumber under each alternative b. Find the present value of each after-tax cash outflow stream, using the after-tax cost of debt. c. Which alternative-lease or purchase would you recommend? 2. The after tax cash outflow associated with the lease in years 1 through 4 is $. (Round to the nearest dollar) The after-tax cath outflow associated with the late in year 5 is $. (Round to the nearest dollar) The after-tax cash outflow associated with the purchase in year is $. (Round to the nearest dollar) The aher-tax cash outflow associated with the purchase in year 2 is $(Round to the nearest dolar) The after-tax cash outflow associated with the purchate in year 3 is $(Round to the nearest dollar) The after-tax cash outfiow associated with the purchase in year 4 is $. (Round to the nearest dollar) The ator-tax cash outlow associated with the purchase in year 5 ls $). (Round to the nearest deltar) b. The total present value of the after-tax cash outlows associated with the lease is $ (Round to the nearest doltar.) The total present value of the after-tax cash outflows associated with the purchase is $ (Round to the nearest dollar) c. Which alternative would you recommend? (Select the best answer below.) Purchase Lease Purchase If the firm purchases the machine, its cost of $180,000 will be financed with a 5-year, 16% loan requiring equal end- depreciated under MACRS using a 5-year recovery period. (See B for the applicable depreciation percentages.) The firm wi maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond a. Determine the after-tax cash outfiows of Northwest Lumber under each alternative. b. Find the present value of each after-tax cash outfiow stream, using the after-tax cost of debt. c. Which alternative-lease or purchase-would you recommend? BER a. The after-tax cash outflow associated with the lease in years 1 through 4 is $ (Round to the nearest dollar.) The after-tax cash outflow associated with the lease in year 5 is (Round to the nearest dollar.) The after-tax cash outflow associated with the purchase in year 1 is $. (Round to the nearest dollar.) The after-tax cash outflow associated with the purchase in year 2 is $. (Round to the nearest dollar.) The after-tax cash outflow associated with the purchase in year 3 is $ (Round to the nearest dollar.) The after-tax cash outflow associated with the purchase in year 4 is $ (Round to the nearest dollar.) The after-tax cash outflow associated with the purchase in year 5 is $ (Round to the nearest dollar.) b. The total present value of the after-tax cash outflows associated with the lease is $ (Round to the nearest dollar) The total present value of the after-tax cash outflows associated with the purchase is $ (Round to the nearest dollar.) c. Which alternative would you recommend? (Select best answer below.) Purchase Lease Click to select your answer(s). Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year Recovery 3 years 5 years 7 years 10 years year 1 33% 20% 14% 10% 2 45% $32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 6% 9 6% 10 4% 11 Totals 100% 100% 100% 100% These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance depreciation using the half-year convention. Lease versus purchase Northwest Lumber Company needs to expand its facilities. To do so, the firm must squire a machine costing S180,000. The machine can be found or purchased. The fem is in the 30% tax bracket and its after-tax cost of debt is 12%. The terms of the lease and purchase plans are as follows: Lease The leasing arrangement requires and of year payments of $52.400 over 5 years. All maintenance costs will be paid by the lessonance and other cols will be borne by the Jessee The losseo will exercise its option to purchase the asset for $22,000 at termination of the base onore any future tax benefit associated with the purchase of the equipment at the end of years under the lease option Purchase of the firm purchases the machine, its cost of $180,000 will be financed with a 5-year, 10% loan requiring equal ond of your payments of $54,974. The machine will be depreciated under MACRS using a 5-year recovery period. (Seo 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 bome by the firm. The firm plans to keep the equipment and use it beyond its 5-year recovery period. a. Determine the after tax cash outflows of Northwest Lumber under och alternative b. Find the present value of each after-tax cash outflow stream, using the after-tax cost of debt. c. Which altemative-lease or purchase-would you recommend