PROBLEM 2
West Hills Village (WHV) in Rapid City, South Dakota is evaluating a guideline lease agreement on laundry equipment
that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate
on a four-year loan if WHV decided to borrow and buy rather than lease. The laundry equipment has a
four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHV buys
the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at
the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease
payment at the beginning of each year. WNV's tax rate is 40 percent. Should the home lease or buy?