Guzman Trucking Company needs to acquire a new machine to expand its operations. The machine can...

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Finance

Guzman Trucking Company needs to acquire a new machine toexpand its operations. The machine can be leased or purchased. Thefirm is in the 40% tax bracket and its after-tax cost of debt is5.4%. The terms of the lease and purchase are as follows:
Lease: The leasing arrangement requires beginning of yearpayments of $16,900 over five years. The lessor assumesall maintenance costs.
Purchase: If Guzman purchases the machine, the cost of $80,000,will be financed with a five-year, 9% non-amortizing loan.Maintenance costs are $3,000 per year and the machine will have aresidual value of $5,000. The machine falls into the MACRS-5category: 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%.
Which alternative—lease or purchase—do you recommend? Why?

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We will calculate a net benefit of leasing option to choose between lease or purchase alternative Net advantage of leasing NPV of leasing NPV of buying Calculation of net present value NPV of leasing a new machine Year 0 1 2 3 4 5 Lease payments 16900 16900 16900 16900 16900 0 Tax benefit 40 6760 6760 6760 6760 6760 0 Net Cash flow 10140 See Answer

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Guzman Trucking Company needs to acquire a new machine toexpand its operations. The machine can be leased or purchased. Thefirm is in the 40% tax bracket and its after-tax cost of debt is5.4%. The terms of the lease and purchase are as follows:Lease: The leasing arrangement requires beginning of yearpayments of $16,900 over five years. The lessor assumesall maintenance costs.Purchase: If Guzman purchases the machine, the cost of $80,000,will be financed with a five-year, 9% non-amortizing loan.Maintenance costs are $3,000 per year and the machine will have aresidual value of $5,000. The machine falls into the MACRS-5category: 20%, 32%, 19.2%, 11.52%, 11.52% and 5.76%.Which alternative—lease or purchase—do you recommend? Why?