The equipment costs $3,000,000 and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a 11% interest rate. Although the equipment has a 6-year useful life, it is classified as a special-purpose computer and therefore falls into the MACRS 3-year class. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value is $400,000. However, because real-time display system technology is changing rapidly, the actual residual value is uncertain.

As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $270,000 at the beginning of each year. Lewis’s marginal federal-plus-state tax rate is 15%. You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions.

1. What is the present value of owning the equipment?
2. What is the discount rate for the cash flows of owning?

3. What is Lewis’s present value of leasing the equipment?

Answer rating: 100% (QA)

Analyzing Lease vs Purchase Decision 1 Present Value of Owning the Equipment PV Own a Calculate annual depreciation using MACRS 3year class Year 1 333... View the full answer