Determine whether to lease or purchase research equipment

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Reference no: EM131185440

JLB corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40 percent tax bracket, and has a 12% cost of capital. The terms of the lease and of the purchase are as follows:

LEASE: Annual end-of-year lease payments of $25,200 are required over the 3-year life of the lease. All maintenance and insurance costs will be paid by the lessor.

PURCHASE: The research equipment, costing $ 60,000, can be financed with a three year, 15 percent loan. The firm will depreciate the equipment on a straight line basis to a salvage value of $5000. The firm will pay $1800 per year for a service contract that covers all maintenance costs and insurance costs.

a. Determine which is cheaper – buy or lease (use after tax cost of debt as the discount rate)

b. Calculate the NPV on this lease for the lessor. Assume all of the same costs as the purchase decision noted above, as well as the same cost of capital.

Please show work on excel

Reference no: EM131185440

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