Use the following information for the next two problems:

Lester Corporation is determining whether to lease or purchase new equipment. The firm is in the 38% tax bracket, and its after-tax cost of debt is currently 7%. The terms of the lease and the purchase are:

Lease: there are annual end-of-year lease payments of $31,500 which are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor. The lessee will be able to exercise its option to purchase the equipment for $6,000 at the termination of the lease.

Purchase: The equipment which costs $77,000, can be financed entirely with a 12% loan which requires annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (33% in year 1, 45% in year 2 and 15% in year 3). The firm will pay $2,000 per year for a service contract that covers maintenance costs.

11.Calculate the present value of the cash outflow for the lease alternative.

12.Calculate the present value of the cash outflow for the purchase alternative.