Lease or buy
You have been asked to evaluate a
lease-purchase investment on a piece of equipment with a three-year MACRS
depreciable life (33%-45%-15%-7%). The cost of the equipment is $100,000 plus
$15,000 for transportation and $10,000 for installation. Your bank will finance
the investment for three years at prime plus 130 basis points. The prime rate
is 4.75%. Your tax rate is 40 percent. Your annual operation and maintenance
contract on the equipment is $35,000. The equipment can be sold at the end of
three years for $45,000.
You can lease the same piece of
equipment, delivered and installed, for an all-in cost of $65,000 per year, for
three years, payable at the beginning of each year.
What is the net PV of lease
versus purchase? What is your recommendation?
Please show calculations.
