Halfway through 2007, Arco Corporation decides to acquire some heavy equipment

(this is in addition to the $800,000 in equipment purchases it has previously made this year).The new equipment is 7-year class property, but Arco expects that it will be able to use the equipment for 8 years. It could purchase the equipment for $120,000 cash, and at the end of 8 years it would have no salvage value.

Alternatively, Arco could lease the equipment for 8 years for $22,000 annually.

Arco is in the 35 percent marginal tax bracket and uses a 6 percent discount rate for evaluation. Should Arco purchase or lease the equipment? Prepare a schedule showing your calculations to support your recommendation.

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