The owners of the store will obtain a loan for 8% for the full amount of the

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Question:

The owners of the store will obtain a loan for 8% for the full amount of the system. The loan would be amortized over the 5-year life of the system with payments made at the end of each year. The system is classified as special purpose; hence it falls into the MACRS 3 year class with depreciation rates of (33%; 45%, 15% and 7%).

If the system is purchase a maintenance contract will be obtained for $30,000 payable at the start of each of the next 4 years. The firm will upgrade the system at the end of four years and sell the current system for $95,000.

As an alternative, ABC Leasing will write 4 year lease on the system, including maintenance, for payments of $325,000 at the beginning of each year. The firms marginal federal plus state tax rate is 35%.

On an EXCEL spread sheet compute the net advantage to leasing.

Clearly note the following on the EXCEL spreadsheet:

a) Initial cost of owning

b) Year one operating cash flow of owning

c) Net sale price (if owned)

d) Cost of Owning

e) Cost of capital used to evaluate project

f) Operating cost in year 1 associated with leasing

g) Cost of Leasing

h) Net advantage (disadvantage) of leasing.