Tax Savings

Year 1 - 2,250; 3,038; 8,303; 10,125

Year 2 - 3,000; 10,125; 2,250; 6,750

Year 3 - 8,303; 500; 1,000; 3,038

Year 4 - 500; 8,303; 10,125; 3,038

Net Cash flow

Year 1 - 20,682; 2,168; 3,650; 30,415

Year 2 - 2,918; 30,415; 20,682; 3,650

Year 3 - 20,682; 3,650; 918; 30,415

Year 4 - 30,415; 418; 3,650; 20,682

Consider the case of Mitata Company: Mitata Company is considering the purchase of new manufacturing equipment that will cost $15,000 (including shipping and installation). Mitata can take out a four-year, $15,000 loan to pay for the equipment at an interest rate of 3.60%. The loan and purchase agreements will also contain the following provisions: The annual maintenance expense for the equipment is expected to be $150. The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery System's (MACRS) depreciation rates for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. The corporate tax rate for Mitata is 45%. Note: Mitata Company is allowed to take a full-year depreciation tax-saving deduction in the first year. Based on the preceding information, complete the following tables: Value Annual tax savings from maintenance will be: $31 Year 1 $682 Year 3 Year 4 Tax savings from depreciation Net cash flow $75 $143 Year 1 Year 2 Year 3 Year 4 Tax savings from depreciation Net cash flow Thus, the net present value (NPV) cost of owning the asset will be: O-$8,816 O $10,666 O-$8,315 O-$20,476 Mitata Company has been offered an operating lease on the same equipment. The four-year lease requires end-of-year payments of $600, and the firm will have the option to buy the asset in four years for $3,300. The firm will want to use the equipment longer than four years, so it plans to exercise this option. All maintenance will be provided by the lessor. What is the NPV cost of leasing the asset? -$5,385 O $14,048 O-$952 O-$4,308 Should Mitata lease or buy the equipment? Lease Buy