Unformatted text preview: cipal paid for each year. (Hint: Use
techniques presented in Chapter 4 to find the loan payment.)
LG2 16–4 Lease versus purchase JLB Corporation is attempting to determine whether to
lease or purchase research equipment. The firm is in the 40% tax bracket, and
its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows:
Lease Annual end-of-year lease payments of $25,200 are required over the 3year life of the lease. All maintenance costs will be paid by the lessor; insurance
and other costs will be borne by the lessee. The lessee will exercise its option to
purchase the asset for $5,000 at termination of the lease.
Purchase The research equipment, costing $60,000, can be financed entirely
with a 14% loan requiring annual end-of-year payments of $25,844 for 3 years.
The firm in this case will depreciate the equipment under MACRS using a 3year recovery period. (See Table 3.2 on page 100 for the applicable depreciation
percentages.) The firm will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs...
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