Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond
home office. The system receives current market prices and other information from several online
data services and then either displays the information on a screen or stores it for later retrieval by the
firm’s brokers. The system also permits customers to call up current quotes on terminals in the lobby.
The equipment costs $1,000,000 and, if it were purchased, Lewis could obtain a term loan for the full
purchase price at a 10% interest rate. Although the equipment has a 6-year useful life, it is classified as
a special-purpose computer and therefore falls into the MACRS 3-year class. If the system were
purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at
the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its
residual value is $200,000. However, because real-time display system technology is changing rapidly,
the actual residual value is uncertain.
As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that
Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including
maintenance, for payments of $260,000 at the beginning of each year. Lewis’s marginal federal-plus-
state tax rate is 40%. You have been asked to analyze the lease-versus-purchase decision and, in the
process, to answer the following questions: