Question

-17-4 (similar to) Lease versus purchase JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 23% tax bracket, and its after-tax cost of debt is currently 9%. The terms of the lease and of the purchase are as follows: Lease Annual end-of-year lease payments of $27,000 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $6,500 at termination of the lease. Ignore any future tax benefit associated with the purchase of the equipment at the end of year 3 under the lease option. for the Purchase The research equipment, costing $65,000, can be financed entirely with a 12% loan requiring annual end-of-year payments of $27,063 for 3 years. The firm in this case will depreciate the equipment under MACRS using a 3-year recovery period. (See applicable depreciation percentages.) The firm will pay $2,000 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period. a. Calculate the after-tax cash outflows associated with each alternative. (Hint: Because insurance and other costs are borne by the firm under both alternatives, those costs can be ignored here.) b. Calculate the present value of each cash outflow stream, using the after-tax cost of debt. c. Which alternativc lcasc or purchase would you recommend? Why? a. The after-tax cash outflow associated with the lease in year 1 is $ (Round to the nearest dollar) Data Table - X Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year Recovery 3 years 5 years 7 years 10 years year 33% 20% 14% 10% 45% 32% 25% 19% 15% 19% 18% 14% 7% 12% 12% 12% 12% 9% 9% 8% 9% 5% 9% 4% 6% 11 Totals 4% 100% 100% 100% 100%

Answer 1

PLEASE FIND THE ATTACHED PHOTOS FOR YOUR QUERIES, THANK YOU
WE SHALL ASCERTAIN THE AFTER TAX CASH FLOWS FOR THE LEASE PAYMENTS LEASE 23% YEAR LEASE PAYMENT (-)TAX(23%) (+) ASSET PURCHASE AFTER TAX CASH FLOWS 27000 6210 27000 6210 27000 6210 6500 27290 20790 20790 PURCHASE YEAR OP.BAL 65000 45737 24162.44 PAYMENT 27063 27063 27063 INTEREST(12%) PRINCIPAL 7800 19263 5488.44 | 21574.56 2899.4928 24163.5072 CL.BAL 45737 24162.44 - 1.0672 YEAR 1 33% 45% 15% DEPRECIATION MACRS) 21450 29250 9750 TAX SHIELD(23%) 4933.5 6727.5 2242.5 Sheet1 Sheet2 Sheet3 100% N d Cat 11:24 PM 04/2020 e ☺ ☺ a w 5 0 9

YEAR D 33% 45% 15% 2 DEPRECIATION(MACRS) 21450 29250 9750 TAX SHIELD(23%) 4933.5 6727.5 2242.5 AFTER TAX CASH FLOW 8 XB SS YEAR PAYMENT - (-)INTEREST TAX SHIELD (-)DEPRECIATION TAXSHIELD (+)MAINTAINENCE COST AFTER TAX CASH FLOW 27063 1794 4933.5 2000 22335.5 27063 1262.3412 6727.5 2000 21073.1588 27063 666.883344 2242.5 2000 26153.61666 B CALCULATION PV VALUE NS3 & 8 GBBB 8 8 8 YEAR LEASE CASH FLOWS PURCHASE CASH FLOWS PV FACTOR(9%) 20790 22335.5 0.92 20790 21073.1588 0.84 27290 26153.61666 0.77 TOTAL PV LEASE 19126.8 17463.6 21013.3 57603.7 PV PURCHASE 20548.66 17701.45339 20138.28483 58388.39822 SINCE THE PV OF PURCHASE IS GREATER THAN PV OF LEASE, I WOULD RECOMMEND THE ACCEPTANCE OF PURCHASE OPTION

WE SHALL ASCERTAIN THE AFTER TAX CASHFLOWS FOR THE FASE YEAR LEASE PAYMENT UTAX(235) JASSET PURCHASE AFTER TAX CASH FLOWS 27000 11'C12 27000 -F11'C12 127000 G11'C12 6500 27290 20790 PURCHASE OPIA PAYMENT 65000 15737 27063 27063 27063 INTEREST12 -02112 022812 023123 PRINCIPAL €21.F21 1-622 F22 -E2121 CLRAL 021-621 -022-622 1623 2416114 TAX SHIELDEN DEPRECIATION MACRS) 65OCO"827 65000'828 65000*229 -027'23% 02823% -029.23% LAETER TAX CASHFLOY YEAR PAYMENT INTEREST TAX SHIELD DEPRECIATION TAXSHIELD TO MAINTAINENCE COST AFTER TAX CASH FLOW 2706 -F213 49333 2000 036-37-038+039 27063 F22.23% 6727.5 2000 E36 E 127063 2323 122425 12000 +36 37-73339 39 BCALCULATION PV VALUE PV FACTORIIN LEASE CASH FLOWS YEAR PURCHASE CASH FLOWS 223355 21073.1538 26153.616656 20790 20790 27290 10.92 0.84 10.77 PLEASE 046746 --0477a7 =043F08 ESUMG36- G PY PURCHASE 746786 6 47747 43748 S UMH6 Has TOTAL cl SINCE THE PV OF PURCHASE IS GREATER THAN PV OF LEASE! Sheet1 Sheet2 Sheet3 2 N B C & 1:26 PM 1/24/2012)