Question

Lego Corporation is planning on replacing all of its copiers and has decided on a model manufactured by Xerox. Lego has been offered a five-year lease, including all maintenance, for $1,000 per year for each copier. Lego has a tax rate of 25%, which results in an after-tax cost of leasing of $750 per year. Lego is also considering purchasing the machines and wants to know the annual cost of purchasing so they can compare it to the $750 after-tax cost of leasing. Each copier would have a cost of $2,500 and be depreciated straight-line over five years. A maintenance agreement would run $500 per year. Paper and toner use would be identical, regardless of whether the copiers are leased or purchased and the copier has no salvage value at the end of five years. With Lego’s 25% tax rate and a required rate of return of 9%, calculate the EAA/EAC. Should they purchase or lease?

Solve with excel and show work

Answer Choices:

$3,472.41

-$892.73

$566.88

-$355.78

Answer 1