Storage tanks to hold a highly corrosive chemical are currently made of material Z26. The capital investment in a tank is $30,000, and its useful life is eight years. Your company manufactures electronic components and uses the ADS under MACRS to calculate depreciation deductions for these tanks. The net MV of the tanks at the end of their useful life is zero. When a tank is four years old, it must be relined at a cost of $10,000. This cost is not depreciated and can be claimed as an expense during year four.
Instead of purchasing the tanks, they can be leased. A contract for up to 20 years of storage tank service can be written with the Rent-All Company. If your firm's after-tax MARR is 12% per year, what is the greatest annual amount that you can afford to pay for tank leasing without causing purchasing to be the more economical alternative? Your firm's effective income tax rate is 40%. State any assumptions you make.