Lease versus Purchase Decision. Carter Company wishes to expand its productive capacity. In order to do so it must acquire a new tractor costing $40,000. The machine can be purchased or leased. The...

Lease versus Purchase Decision. Carter Company wishes to expand its productive capacity. In order to do so it must acquire a new tractor costing $40,000. The machine can be purchased or leased. The firm is in the 40 percent tax bracket and its after-tax cost of debt is currently 6 percent.

                If the firm purchased the machine, the purchase would be totally financed with a 10 percent loan requiring equal annual end-of-year payments over 5 years. The machine would be depreciated straight-line over its 5-year life. A salvage value of zero is anticipated. The life of a lease would be 5 years. The lessor intends to charge equal annual lease payments that will enable it to earn 15 percent on its investment. In doing the following calculations, round your answers to the nearest dollar

                (a) Calculate the annual lease payment required in order to give the lessor its desired return. (b) Calculate the annual loan payment paying 10 percent interest. (c) Determine the after-tax cash outflows associated with each alternative. (d ) Find the present value of the after-tax cash outflows using the after-tax cost of debt. (e)Which alternative (i.e., lease or purchase) would you recommend? Why?