Present Value of owning the equipment Present Value of leasing the equipment Initial Investment Installation cost Total installation cost Depreciation Schedule Depreciable cost Year 0 Year 1 year 2 Year 3 Year 4 7.41% MACRS Rate Annual Depreciation Initial Investment Installation cost Total installation cost $ 1,000,000 $ 1,000,000 Depreciation Schedule Year 0 Year 1 year 2 Depreciable cost $ 1,000,000 $ 1,000,000 Year 3 $ Year 4 1,000,000 $ 1,000,000 MACRS Rate 33.33% Annual Depreciation $ 333,300 $ 44.45% 444,500 $ Remaining Book Value Cost of Ownership Maintenance Contract (Depreciation) Interest Expense @ 13% Total Expense $ 666,700 $ 222,200 $ 14.81% 148,100 $ 74,100 $ 74,100 Year 0 Year 1 year 2 Year 3 Year 4 -320,000 -320,000 $ (333,300) $ -320,000 (444,500) $ -320,000 (148,100) $ $ (130,000) $ (130,000) $ (130,000) $ (Taxes @30%) -320,000 -96000 -783,300 -894,500 -598,100 (74,100) (130,000) -204,100 -234990 -268350 -179430 Total Exp-Tax Shield -224,000 -548,310 -626,150 -418,670 -61230 -142,870 Depreciation 0 $ 333,300 $ Total cost of ownership -224,000 -215,010 444,500 $ -181,650 148,100 $ -270,570 74,100 -68,770 After-tax salvage Value Sales price 230,000 Book value Gain(loss) on sale taxes @ 30% After-tax proceeds Net Costs Cost of ownership Loan Payment After-tax salvage value incremental cash flows NPV @ after-tax cost of debt 230,000 69000 161,000 Year 0 Year 1 year 2 Year 3 Year 4 -224,000 -215,010 -181,650 -270,570 -68,770 -224,000 -215,010 -181,650 -270,570 ($1,422,775.40) PV cost of owning the equipment $ (1,000,000) 161,000 -907,770 Remaining Book Value Cost of Leasing Lease Cost (Taxes @30%) Year 0 Year 1 -320,000 -320,000 year 2 Year 3 -320,000 -320,000 Year 4 -96000 -96000 -96000 -96000 -224,000 -224,000 -224,000 -224,000 Total Exp- Tax Shield NPV @ after-tax cost of debt Net Advantage of Leasing PV cost of owning PC cost of leasing ($790,000.99) ($1,422,775.40) ($790,000.99) NAL ($632,774.42) Lease the equipment