The lessee would exercise its option to purchase the

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Unformatted text preview: rance and other costs would be borne by the lessee. The lessee would exercise its option to purchase the machine for $4,000 at termination of the lease. Purchase The firm would finance the purchase of the machine with a 9%, 5-year loan requiring end-of-year installment payments of $6,170.3 The machine would be depreciated under MACRS using a 5-year recovery period. The firm would pay $1,500 per year for a service contract that covers all maintenance costs; insurance and other costs would be borne by the firm. The firm plans to keep the machine and use it beyond its 5-year recovery period. Using these data, we can apply the steps presented earlier. Step 1 The after-tax cash outflow from the lease payments can be found by multiplying the before-tax payment of $6,000 by 1 minus the tax rate, T, of 40%. After-tax cash outflow from lease $6,000 $6,000 (1 (1 T) 0.40) $3,600 2. Lease payments are generally made at the beginning of the year. To simplify the following discussions, end-ofyear lease payments are assumed. 3. The annual loan payment on the 9%, 5-year loan of $24,000 is calculated by using the loan...
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