A contractor is considering whether to buy or lease a new machine for her layout

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

Explanation / Answer

Part A:

1200*0.3269 = $392

Lease Option:

Therefore, Buy is a better option.

Part B:

Buy Option:

Calculation of Tax Shield :

Lease Option:

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

So buy option is better

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