Question: Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years.

Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the fabricator for $130,000 per year for seven years. Craxton’s tax rate is 35%. (Assume the fabricator has no residual value at the end of the seven years.)
a. What are the consequences of buying the fabricator if the lease is a true tax lease?
b. What are the consequences of leasing the fabricator if the lease is a true tax lease?
c. What are the incremental free cash flows of leasing versus buying?

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