Question

West Hills Village (WHV) in Rapid City, South Dakota is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class. The home can borrow at an 8 percent rate on a four-year loan if WHV decided to borrow and buy rather than lease. The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHV buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year. The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year. WNV's tax rate is 40 percent. Should the home lease or buy?

Please show how to do this in excel

Answer 1

Step 1: 3-year MACRS schedule:

Step 2: Annual loan installment: PV = 250,000; N = 4; rate = 8%, solve for PMT. Annual payment = 75,480.20

Loan amortization schedule:

Step 3: Present Value (PV) of borrowing & buying

Discount rate = after-tax cost of debt = 8%*(1-40%) = 4.80%

Sep 4: PV of leasing

Since the PV of leasing is more than the PV of owning the equipment, it is cheaper to buy rather than lease.