Renaud Excavation needs a piece of equipment that costs $20,000. The company can either lease the equipment or borrow $20,000 from a local bank and buy the equipment on a 3-year loan. If the company buys the equipment it will be depreciated using MACRS with a 3-year class. The company will also buy a maintenance contract at a cost of $500 per year (paid at the beginning of each year). If the company leases the equipment on a 3-year lease, the payment would be $8,000 at the beginning of each year. The equipment will have a residual value of $1,000 at the end of three years. Assume that the tax rate is 40 percent and that the company can borrow at 10 percent before taxes.

(EXCEL TEMPLATE) Should Renaud lease or buy? What is the Net Advantage to Leasing?

(EXCEL TEMPLATE) What is the maximum lease payment that Renaud would be willing to pay?

7, Should Renaud lease or bu What is the Net Advantage to Leasing? Equip Cost Depr. Rate AT Loan Payment Depr Tax Shield Maintenance Tax on Maintenance ATSV Total Cash Flow Lease Pmt Tax Savings Total Cash Flow NPV-Leasing NAL of Lease 8. What is the maximum lease payment that Renaud would be willing to pay Hint: AFTER TAX cash flows of leasing need to have the same NPV as owning. Use the NPV of owning as the PV in a payment calculation. Remember that the payment is at the BEGINNING of the period for the lease. Solve for Payment (PMT The payment amount that you just calculated is on an AFTER TAX basis, so find the BEFORE TAX amount and place it in the Lease Pmt box below. Lease Pmt Tax Savings Total Cash Flow NPV Leasing The NPV of leasing in cell B35 should be the same number as cell B13 above