Question

A contractor is considering whether to buy or lease a new machine for her layout site work. Buying a new machine will cost $12,000 with a salvage value of $1200 after the machine's useful life of 8 years. On the other hand, leasing requires an annual lease payment of $3000, which occurs at the state of each year. The MARR is 15%. On the basis of an internal rate of return analysis, which alternative sgould the contractor be advised to accept.

Note: Please use the details below: (regard the given in the problem)

Part A: – Do the lease-buy analysis before tax.

Part B – Do the analysis after tax. Use a tax rate of 22.98%,

and MACRS 7-year depreciation schedule.

Use of Excel is encouraged

Answer 1

Part A:

Cost of Purchase of Assets

$12,000

Present Value of SV

1200*0.3269 = $392

The cost to be incurred if Assets Purchased

$11,608

Lease Option: Year Lease Rent Discounting Factor Present Value 1 $3,000 0.869565217 $2,608.70 2 $3,000 0.756143667 $2,268.43 3 $3,000 0.657516232 $1,972.55 4 $3,000 0.571753246 $1,715.26 5 $3,000 0.497176735 $1,491.53 6 $3,000 0.432327596 $1,296.98 7 $3,000 0.37593704 $1,127.81 8 $3,000 0.326901774 $980.71 $13,461.96

Therefore, Buy is a better option.

Part B:

Buy Option:

Cost of Purchase of Assets	$12,000
Present Value of SV	1200*0.3269
Present Value of Tax Shield	$1,729
The cost to be incurred if Assets Purchased	$9,879

Calculation of Tax Shield :

Year	Depreciation Rate	Depreciation	Tax Shield on Depreciation	Discounting Factor	Present Value
1	14%	$1,714.80	$394.06	0.869565217	$342.66
2	24%	$2,938.80	$675.34	0.756143667	$510.65
3	17%	$2,098.80	$482.30	0.657516232	$317.12
4	12%	$1,498.80	$344.42	0.571753246	$196.93
5	9%	$1,071.60	$246.25	0.497176735	$122.43
6	9%	$1,070.40	$245.98	0.432327596	$106.34
7	9%	$1,071.60	$246.25	0.37593704	$92.58
8	4%	$535.20	$122.99	0.326901774	$40.21
					$1,728.92

Lease Option:

Year	Lease Rent	Post Tax Lease Rent	Discounting Factor	Present Value
1	$3,000	$2,311	0.869565217	$2,009.22
2	$3,000	$2,311	0.756143667	$1,747.15
3	$3,000	$2,311	0.657516232	$1,519.26
4	$3,000	$2,311	0.571753246	$1,321.09
5	$3,000	$2,311	0.497176735	$1,148.78
6	$3,000	$2,311	0.432327596	$998.94
7	$3,000	$2,311	0.37593704	$868.64
8	$3,000	$2,311	0.326901774	$755.34
				$10,368.41

Therefore, Present Value of Post-tax Lease Rental is $10,368.41 which is more than Buy option.

So buy option is better