Microsoft Corporation wants to acquire a new machine that costs $55,000. Microsoft consider making leasing instead of

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Question:

Microsoft Corporation wants to acquire a new machine that costs $55,000. Microsoft consider making leasing instead of purchase the machine. The firm is in the 22% tax bracket. The firm has gathered the following information:

Purchase: Microsoft can finance the purchase of the machine with an 10%. To enter that financing contract, a 25% down payment should be made. The machine would then be depreciated under double declining balance using a 5-year recovery period with $5,000 salvage value. Morris would pay $2,250 per year for a service contract that covers all maintenance costs and $1,000 per year for insurance.

Lease: The lessor would pay all maintenance costs; insurance and other costs would be borne by the lessee. Microsoft would be given the right to exercise its option to purchase the machine for $5,000 at the end of the lease term.

Based on above information, Microsoft considering two leasing alternatives: 4 years and 5 years leasing period. You need to make suggestion for the fair prices of the leasing fee if the leasing period is 4 years and 5 years?

Question 1 : Please answer based on step explanation

Question 2 : Which alternative is preferable