You have been assigned the task of analyzing whether to purchase or lease some transportation equipment for your company. The analysis period is six years, and the base year is year zero (b = 0). Other pertinent information is given in Table P8-45. Also,
a. The contract terms for the lease specify a cost of $300,000 in the first year and $200,000 annually in years two through six (the contract, i.e., these rates, does not cover the annual expense items).

b. The after-tax MARR (not including inflation) is 13.208% per year (ir).
c. The general inflation rate (I) is 6%.
d. The effective income tax rate (0 is 34%.
e. Assume the equipment is in the MACRS (GDS) five-year property class.
Which alternative is preferred? (Use an after-tax, actual dollar analysis and the FW criterion.)

TABLE P8-45 Table for Problem 8-45 Estimate in Year-0 Dollars Best Estimate of Price Change 1% per year) Cash Flow Item Capital investment MV at end of six years Annual operating, insurance, and other expenses Annual maintenance expenses Purchase $600,000 90,000 26,000 32,000 Lease 2% $26,000 32,000