The MVA Corporation needs a new line of machinery for producing a new design of tablet covers. The cost of the machinery will be $250,000 if they decide to purchase it. They will pay $50,000 in cash and finance the rest of the purchase price with a term loan from a bank with annual payments over eight years. The machinery would be depreciated using the MACRS ten-year schedule of rates. If they purchase the machinery, they estimate that it will cost $4,500 per year to have the machinery maintained and repaired to keep it in good working order. At the end of the eight years, they estimate that they could sell the machinery for $45,000.

The BSU Leasing Company would be willing to lease the above described machinery to MVA for $58,000 per year, payable at the beginning of each year. BSU is including the maintenance of the equipment in the lease payment.

Assume a 34% tax rate and a 9% interest rate.

Construct a spreadsheet to analyze the lease versus buy option for MVA. Make sure to clearly label all cash flows. Which option is cheapest for MVA? If instead, the machinery could be depreciated using the MACRS 5-year rates, would the decision change? Explain.