Question

1. The Misthosi Company is considering the acquisition of a machine that costs of $50,000 if bought today. The company can buy or lease the machine. If it buys the machine, the machine would be depreciated as a 3-year MACRS asset and is expected to have a salvage value of $1,000 at the end of the 5-year useful life. If leased, the lease payments are $12,000 each year for five years, payable at the beginning of each year. The tax rate of Mishthosi is 30% and its cost of capital is 10%. Compare the option of buying and leasing to help the company decide which alternative they should choose. Please show all work using EXCEL and show contents in each cell.

3-Year MACRS

Year	Rate
1	33.33%
2	44.45%
3	14.81%
4	7.41%

Answer 1

Cost of leasing is lesser than buying. Hence they should lease the machine.

	BUY
Year	Cost	Tax shield on depreciation	Salvage after tax	Net Cash flow
0	-50000			-50000
1		4999.500		4999.5
2		6667.500		6667.5
3		2221.500		2221.5
4		1111.500		1111.5
5			700	700
			NPV	-37081.81

LEASE
Year	Lease after tax
0	-8400
1	-8400
2	-8400
3	-8400
4	-8400
5	0
NPV	-35026.87

WORKINGS