You have the option to purchase or lease a five-axis horizontal machining center

Question

You have the option to purchase or lease a five-axis horizontal machining center. Any revenues generated from the operation of the machine will be the same whether it is leased or purchased. Considering the information given, should you lease or purchase the machine? Conduct after-tax analyses of both options. The effective income tax rate is 36%, the evaluation period is five years, and the MARR is 10% per year. Click the icon to view notes and information about two options. Click the icon to view the GDS Recovery Rates (R) for the 3-year property class. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year. Click the icon to view the interest and annuity able or discrete compounding when t e MARR s % per year. Calculate the AW value for the Leasing Option Aw,easing(10%)--50940 (Round to the nearest hundreds) Calculate the AW value for the Purchasing Option AWpurchasing(10%)-U (Round to the nearest hundreds.)

Explanation / Answer

Let us find PV under puchase option

Purchase price = 349000

Installments = 349000/PVIFA(9%,3years)

=349000/2.5313

=137,874.1$

Amortization schedule

Statement showing depriciation

Statement showing cash outflow

Statement showing salvage value

Option 2) Leasing

leasing cost after tax savings

=60,000 - (60000*36%)

=38400$

PV of leasing cost = 38400*PVIFA(10%,3years)

=38400*2.487

=95495.11$

Statement showing cash out flow

Thus leasing should be selected

Year Opening balance installment Principal Interest @9% closing balance 1 349000 137874 106464 31410 242536 2 242536 137874 116046 21828 126490 3 126490 137874 126490 11384 0

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