ABC, a young windmill installation company, is considering whether to buy or lease a crane.

Below are the specifics for the lease vs buy decision:

$$ Leasing would cost $$128,000$ per year at the beginning of each year.

$$ The lease contract term is $5$ years with the first year$$s payment due at the time of

contract signing.

$$ The lease would be considered a guideline lease.

$$ Maintenance costs are covered under the lease agreement.

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$$ Purchase of the crane would cost $$500,000.$

$$ Purchased crane would be depreciated using the $5-$year MACRS depreciation schedule:

$20\%,32\%,19\mathrm{.}2\%,11\mathrm{.}52\%,11\mathrm{.}52\%,5\mathrm{.}76\%$ for years $16$ respectively.

$$ The crane is expected to be sold for $$80,000$ at the end of year $5.$

$$ The maintenance on the crane would cost $$12,000$ a year, to be paid for at the end of

each of the $5$ years.

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$$ Cost of debt $=10\%.$

$$ Tax rate of the firm is $25\%.$

$$ The firm is profitable and pays taxes.

Page $3$ of $4$

a$.$ What is the PV cost of leasing?

b$.$ What is the PV cost of ownership?

c$.$ What is the net advantage to leasing $($NAL$)?$

d$.$ If ABC doesn$$t have enough cash to buy the equipment outright and must

borrow, would that affect the NAL? Why?

e$.$ Should ABC buy or lease?

f$.$ Give a scenario where ABC would be better off if they chose the other

option.

g$.$ At what cost per year for leasing would ABC be indifferent between leasing

and buying? $($Hint: use $$Goal Seek$$ in Excel under the $$Data$$ tab and

$$What$-$if Analysis$)$