Some new materials handling equipment is being considered for purchase or lease. The initial cost of the equipment would be $150,000, with a life of eight years, salvage of 5% of the equipments first cost, and operating costs of $20,000 per year. The firm desires a 12% ROI. A leasing firm has quoted $35,000 per year for the same system. The firm would still have the same operating costs to pay but would not have the salvage value with the lease.

Determine the following:

1. The annual cost of the equipment at 12%

b. The advantages and disadvantages of the purchase and lease alternatives