Problem 1.

Please note this is from the point of view of the lessee, the renter, not the owner.

A Company is evaluating a potential lease for a computer system with a 6-year life that costs $200,000 and falls into the MACRS 5-year class. If the firm borrows and buys the computer system, the loan rate would be 9%. The computer system will be used for 6 years, at the end of which time it will be sold at an estimated residual value of $20,000. If the company buys the computer system, it will purchase a maintenance contract that costs $3,000 per year, payable at the end of each year. The lease terms call for a $50,000 lease payment (6 payments total) at the beginning of each year. The company's tax rate is 40%. Should the firm lease or buy?

Note: MACRS rates for Years 1 to 6 are 0.20, 0.32, 0.19, 0.12, 0.11 and 0.06.