The Boggs Machine Tool Company has decided to acquire a pressing machine. One alternative is to… 1 answer below »

The Boggs Machine Tool Company has decided to acquire a pressing machine. One alternative is to lease the machine under a three-year contract for a lease payment of $15,000 per year, with payments to be made at the beginning of each year. The lease would include maintenance. The second alternative is to purchase the machine outright for $100,000, financing the machine with a bank loan for the net purchase price and amortizing the loan over a three-year period at an interest rate of 12% per year(annual payment = $41,635). Under the borrow-to-purchase arrangement, the company would have to maintain the machine at an annual cost of $5,000, payable at year-end. The machine falls into a five-year MACRS classification and has a salvage value of $50,000, which is the expected market value at the end of year 3, at which time the company plans to replace the machine irrespective of whether it leases or buys. Boggs has a tax rate of 40% and a MARR of 15%.

(a) What is Boggs’ PW cost of leasing?

(b) What is Boggs’ PW cost of owning?

(c) From the financing analysis in (a) and (b), what are the advantages and disadvantages of leasing and owning?

 

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