The firm plans to keep the equipment and use it

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Unformatted text preview: will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period. a. Calculate the after-tax cash outflows associated with each alternative. b. Calculate the present value of each cash outflow stream, using the after-tax cost of debt. c. Which alternative, lease or purchase, would you recommend? Why? LG2 16–5 Lease versus purchase Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after-tax cost of debt is 9%. The terms of the lease and purchase plans are as follows: Lease The leasing arrangement requires end-of-year payments of $19,800 over 5 years. 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 $24,000 at termination of the lease. Purchase If the firm purchases the machine, its cost of $80,000 will be financed with a 5-year, 14% loan requiring equal end-of...
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