A manufacturing company has some existing semiautomatic production equipment that it is considering replacing. This equipment has a present MV of $57,000 and a BV of $27,000. It has five more years of depreciation available under MACRS (ADS) of $6,000 per year for four years and $3,000 in year five. (The original recovery period was nine years.) The estimated
MV of the equipment five years from now is $18,500. The total annual operating and maintenance expenses are averaging $27,000 per year.
New automated replacement equipment would then be leased. Estimated annual operating expenses for the new equipment are $12,200 per year. The annual leasing costs would be $24,300. The MARR (after taxes) is 9% per year, t = 40%, and the analysis period is five years. (Remember: The owner claims depreciation, and the leasing cost is an operating expense.)
Based on an after-tax analysis, should the new equipment be leased? Base your answer on the IRR of the incremental cash flow.