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Lease or buy

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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.

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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