A manager has decided to buy a widget. Two alternative financing methods are available: (A) use a financial lease or (B) purchase the widget using owner financing and borrowed capital. The financial lease is a 3 year lease with annual lease payments of $6,500 paid at the beginning of each year (a lease payment is tax deductible; assume it can be claimed at the beginning of each year). The manager can buy the widget for $20,000 and sell it again in 3 years for $5,000. A bank will loan $15,000 and the loan will be fully amortized at 10% over 3 years with annual payments. The IRS will allow the widget to be depreciated over 10 years. The marginal tax rate is 15%. The manager requires at least a 10% pre-tax return on capital. Assume that the inflation rate is 0%. Should the manager buy or lease?

To answer this question, you need to find the:

a. after-tax discount rate

b. after-tax lease payment (absolute value)

c. annual depreciation if you lease the widget (absolute value)

d. tax savings from depreciation if you lease the widget (absolute value)

e. present value of the lease payment (absolute value)

f. net present value of leasing the widget (absolute value)

g. annuity equivalent of leasing the widget (absolute value)

h. after-tax terminal value if you purchase the widget (absolute value)

i. annual depreciation if you purchase the widget (absolute value)

j. accumulated depreciation over the first three years if you purchase the widget (absolute value)

k. annual tax savings from depreciation if you purchase the widget (absolute value)

l. present value of the after-tax terminal value if you purchase the widget (absolute value)

m. present value of the tax savings from depreciation if you purchase the widget (absolute value)

n. net present value of purchasing the widget (absolute value)

o. annuity equivalent of purchasing the widget (absolute value)