Final $-$ Part I

Walker Speed$-O$ is considering whether to lease or purchase a piece of research equipment costing

$$150,000.$ The firm is in the $40\%$ tax bracket and its after$-$tax cost of debt is $8\%.$ The terms of each

alternative are as follows:

Lease: Three$-$year term with annual end$-$of$-$year payments of $$59,500.$ The lessor will pay maintenance

costs; Walker$-$Speed$-$O will pay for insurance and other costs. It plans to exercise its $$25,000$ purchase

option at the end of the lease term.

Purchase: Financed with a three$-$year, $13\%$ term loan with equal end$-$of$-$year payments of $$63,530.$

Interest payments are shown below. The test equipment will be depreciated under ACRS using a $3-$year

recovery period. The firm will pay $$3,500$ per year for a maintenance contract and will also cover

insurance and other costs.

To Do: Parts $1-2$

Calculate the after$-$tax cash flows associated with the lease alternative and the after$-$tax cash

flows associated with the purchase alternative.

Calculate the present value of the cash flows for both the lease and the purchase alternatives.

Which alternative should Walker Speed$-$O choose? Why?