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Lease or buy

You have been asked to evaluate a lease-purchase investment on a piece of equipment with a three-year MACRS depreciable life (33%-45%-15%-7%). The cost of the equipment is $100,000 plus $15,000 for transportation and $10,000 for installation. Your bank will finance the investment for three years at prime plus 130 basis points. The prime rate is 4.75%. Your tax rate is 40 percent. Your annual operation and maintenance contract on the equipment is $35,000. The equipment can be sold at the end of three years for $45,000.

You can lease the same piece of equipment, delivered and installed, for an all-in cost of $65,000 per year, for three years, payable at the beginning of each year.

What is the net PV of lease versus purchase? What is your recommendation?

Please show calculations.

Solution Preview

You have been asked to evaluate a lease-purchase investment on a piece of equipment
with a three-year MACRS depreciable life (33%-45%-15%-7%). The cost of the
equipment is $100,000 plus $15,000 for transportation and $10,000 for installation. Your
bank will finance the investment for three years at prime plus 130 basis points. The
prime rate is 4.75%. Your tax rate is 40 percent. Your annual ...

Solution Summary

The solution explains how to make the lease or buy decision.

$2.19