Roberts Company, a small machine shop, is contemplatingacquiring a new machine that costs
$24,000. Arrangements can be made to lease or purchase the machine.The firm is in the 40%
tax bracket. The firm would obtain a 5-year lease requiring annualend-of-year lease payments
of $6,000. All maintenance costs would be paid by the lessor, andinsurance and other costs
would be borne by the lessee. The lessee would exercise its optionto purchase the machine for
$1,200 at termination of the lease.
The firm would finance the purchase of the machine with a 9%,5-year loan requiring end-of-
year installment payments of $6,170. The machine would bedepreciated by 20% in year 1, 32%
in year 2, 19% in year 3, and 12% in years 4 and 5. The firm wouldpay $1,500 per year for a
service contract that covers all maintenance costs; insurance andother costs would be borne by
the firm. The firm plans to keep the machine and use it beyond its5-year recovery period.

i. Find the after-tax cash outflows for each year under thelease alternative.
ii. Find the after-tax cash outflows for each year under thepurchase alternative.
iii. Calculate the present value of the cash outflows associatedwith the lease and purchase
alternatives using the after-tax cost of debt as the discountrate.
iv. Choose the alternative with the lower present value of cashoutflows from Step 3. It will
be the least-cost financing alternative.