The firm could lease the asset. The PV of the cash outflows for leasing is $27,890.

A firm could buy the asset for $30,000 by borrowing the funds at 10 percent for three years. Interest will be paid annually and the entire loan repaid at maturity. The firms tax rate is 20 percent.

If the firm does buy, maintenance will be $1,000 in year one and increase by $1,000 each year.

The estimated salvage value is $0, and depreciation will be $10,000 annually.

What is the PV of the projected cash outflows for owning for three years. Assume a 30 percent income tax rate.

Is leasing the better alternative if management uses a cost of funds of 10 percent? To answer the answer the question, complete the table.

Cash flows under purchasing and borrowing:

Year 0 1 2 3

Principal

repayment

Interest

Maintenance

Depreciation

Tax deductible

expenses

Tax savings

Salvage value

(after tax)

Cash outflows

PV of cash outflows