Question

7-25. Two different copying machines are being considered in your company. The Mortar copier would be purchased while the Xrocks copier would be leased. The company will replace any copier selected at this time after three years (i.e., the planning horizon for this evaluation is three years). The MACRS depreciation recovery period for office equipment is seven years. Assume an income tax rate of 40% and an after-tax MARR of 18% per year. Using the data in the table below, which machine would you recommend? (7.9) Mortar Xrocks Initial Investment Annual lease payment Annual operating expenses $800 $1,000 Market value after 3 years $8,000 n/a $19,000 n/a n/a $8,000

Answer 1

Option 1: Purchase

Year	CASHFLOW (a)	deprecation	Total	Tax Savings (40%) (b)	Net Cash Flow (a-b)	PV Factor	PV of Cashflow
0	-19000	0	-19000	0	-19000	1	-19000
1	-800	-2715.51	-3515.51	1406.04	+606.04	0.847	+513.32
2	-800	-4653.10	-5453.10	2181.24	+1381.24	0.718	+991.73
3	-800	-3323.10	-4123.10	1649.24	+849.24	0.609	+517.19
3	+8000	0	+8000	+123.32	+8123.32	0.609	+4947.1
						Total	-12030.66

Capital Loss: WDV Ie [19000-(2715.51+4653.10+3323.10)] less Sale value ie 8000 =308.29

Tax Savings thereon 40%*308.29 = 123.32

Option 2: Leasing

Year	Cashflow	Tax Saving 40%	Net Cash flow	PV factor	Discounted PV
1-3	-(8000+1000) = - 9000	+3600	-5400	2.174	-11,739.60

Since Cash outflows from Option 2: Leasing is lesser than Option 1: purchase, the company should go for Leasing.