Problem 1. PURCHASE VERSUS LEASE CALCULATION (7%)

Baldwin Co. must decide whether to purchase or lease a new piece of

equipment. The equipment can be leased for $4,000 a year or purchased for $15,000.

The lease includes maintenance and service. The salvage value of the equipment at

the end of five years is $5,000. If the equipment is owned, service and maintenance

Charges (a tax-deductible cost) would be $900 a year. The firm can borrow the entire

amount at a rate of 15% if they buy. The tax rate is 50%.

Questions- Please show your detailed calculations. No grade will be awarded for providing the final number without detailed support to your answer.

1. Which method of financingwould you choose?

Use the following capital cost allowance amounts.

Year Amount

1. $4,500
2. $3,150
3. $2,205
4. $1,543
5. $1,081