Lease versus purchase Nothwest Lunter Company needs to e pand ts taolbes 12% The

Question

Lease versus purchase Nothwest Lunter Company needs to e pand ts taolbes 12% The tems of trh@ lease and purchase pans af. ?, folos Todo so, tes "must acore a machi e cost g$110 000 The machne can be leased or purchased Thet misinthe 25% tax bracket and its aner-tax cost of debt is Lease me leasi ganange me treures end-year payment of S29.000 over 5 years A name ance costs ? be paid by the lessor. nsurance and other costs ? be bone by the lessee The lessee wg exerose t3 opbontopunchase the asset for 28 000 at bermination of the as Ignore any futune tax benett associated with the purchase of the equipment at the end of year 5 under the lease option Pu ch ase lf the fir purchases ne mot ne its oost of S, 10 000 wil be tanced with a 5-year, 14% loan eo ng equal end?raa payments of S32 041 The machine wil be deprecated nder MA CRS s ng a ea ecovery pened (See to the appicate deprecnon percentages ) The firm wnpay $3. 000 per year fora service contract mat covers ? mantenence costs nuance and oner costs wg be bome by ne tr The trm plans to keep the ear ert and use beyond its 5 year recovery period Data Table a. Deermine the er-ar c outoof Nonwest Lumber under each atenative b. Find he prepent value of each aer-tax cash outslow stream using the ahertax cost of debt Which aternative lease or punchase-would you recommend? a The ather-ax cash outtour associated with the lease in years 1 through 4isRound to the nearest d) The ater-tax cash outow associated with the lease in yea5(Round to the nearest dot teatertax caen o now .ssooatee with ". Durchasem year '?1(??Round to me nearest donar ) Theater-tax cash ouAow assocated with ?, purchasen year 2 ??0 (Round ton, nearest dolar ) The ater- tax cash outow associated with the puarchase n year 3sRound to the nearest oolar The ater- taxc cash outow associated with the purchase n year 4isRound to the nearest oola Th. ater-ax cash outow assoc ated vith th* purchase r' year 5 is s (Round tom. nearest dolar ) b. The total present value of the -cash outows socianed with the lease is Recovery 3 years ys years 10 years 7% Round to the nearest dolar 5% Round to the nearest doar) 7% Round to the nearest colar)

Explanation / Answer

As per rules I will answer the first 4 sub parts of the question

1: After tax cash flow associated with leasing in years 1 to 4 = -29000*(1-Tax) = -29000*(1-25%)

= -21750

2: After tax cash flow associated with leasing in year 5= -29000*(1-25%)- 28000 = -49750

3: After tax cash flow associated with purchase in year 1 = -Loan payments+ depreciation tax shield -Service contract*(1-Tax)

= -32041 + 25%*20%*110000- 3000*(1-25%)

=- $ 28791

4:

After tax cash flow associated with purchase in year 2 = -Loan payments+ depreciation tax shield -Service contract*(1-Tax)

= -32041 + 25%*32%*110000- 3000*(1-25%)

=- $ 25491

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