N9

You are looking at either purchasing or leasing a tractor over 150 hp. The tractor has a list price of $300,000. You have a federal tax rate of 20% and a state tax rate of 3%. There is no self-employment tax. The capital gains tax rate is 5%. The max 179 deduction is $500,000. The cost of own capital is 5%. You plan to put 500 hours per year on the tractor and plan to keep the tractor 5 years. There is a one year warranty on the tractor with either option. Purchase option - $20,000 down payment with the rest financed with a 5 year loan at 6%. Lease option - 5 year lease with payments of $45,000. There is no buyout option available. 1. What is the annual cost of both purchasing and leasing? 2. Which is the best way to control this machine. i.e. purchase or lease? 3. What would happen if the max 179 was $0. Would this change your purchase or lease decision?