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    Lease or Buy Problem

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    Sandia Meadows, Inc wants to install $2.8 million of new equipment to update its ski lifts. The company can obtain a bank loan for 100% of the purchase price or it can lease the equipment. Assume the following:

    .The machinery falls into the MACRS 3 year class
    .Estimated maintenance expenses are $90k per year, payable at the beginning of each year.
    .The Company's tax rate is 35%
    .The lease terms call for $480k payments at the end of the next 4 years
    .Under either the Lease or the Purchase, Sandia Meadows, Inc. must pay for insurance, property taxes and maintenance.
    .Assume that Sandia Meadows will continue to use the equipment beyond the expiration of the lease and must purchase it at an estimated residual value of $230k at the end of year 4.

    What does Sandia Meadows do? Lease or buy the equipment.

    Please explain your answers in detail.

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    Solution Preview

    Please see the attachment. As the PV of cost of ownership is more than the PV of cost of leasing, it is better to lease.

    We are given
    New Equipment cost 2,800,000
    New Equipment life 3 year MACRS
    Equip. Salvage Value 230,000
    Annual Maintenance 90,000
    Tax Rate 35%
    Loan interest rate 10% Assumed as it is not given
    Annual lease ...

    Solution Summary

    This solution helps with a lease or buy problem.