Janet Wigandt. an electrical engineer for Instrument Control. Inc. (ICI), has been asked to perform a lease-buy analysis of a new pin-inserting machine for ICI's PC-board manufacturing that has a project life of four years.
• Buy Option: The equipment costs $120,000. To purchase it, ICI could obtain a term loan for the full amount at 10% interest, which is payable in four equal end-of-year annual installments. The machine falls into a five-year MACRS property classification. Annual revenues of $200,000 and operating costs of $40,000 are anticipated. The machine requires annual maintenance at a cost of $10,000. Because technology is changing rapidly in pin-inserting machinery, the salvage value of the machine is expected to be only $20,000.
• Lease Option: Business Leasing, Inc. (BLI) is willing to write a four-year operating lease on the equipment for payments of $44,000 at the beginning of each year. Under this arrangement, BLI will maintain the asset so that the annual maintenance cost of $10,000 will be saved. Id's marginal tax rate is 40%, and its MARR is 15% during the analysis period.
(a) What is ICI's present-value (incremental) cost of owning the equipment?
(b) What is ICI's present-value (incremental) cost of leasing the equipment?
(c) Should ICI buy or lease the equipment?