Fanverse Athletic Shoes (FAS) wants to acquire a new leather-sewing machine. To buy it, FAS would have to borrow the entire cost, which would be $162,156.43. There are 10 equal annual payments starting immediately with an interest rate of 5%. On the other hand, FAS could lease the machine for the same payment per year, payable immediately for a 10 year period at 5% interest. Both interest rates and FAS's cost of capital are 5%. The machine will last 10 years and have no salvage value. The tax rate is 40%. The machine qualifies for a capital cost allowance of 30%.
Required:
(a) Prepare the 10-year loan amortization schedule.
(b) Prepare the 10-year capital cost allowance schedule under the purchase option.
(c) Prepare the 10-year tax shield schedule for the purchase option.
(d) Prepare the after-tax net present value of the purchase option.
(e) Prepare the after-tax net present value of the lease option.
(f) Is leasing or purchasing better for FAS?