The Case Western Truckling Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The...

The Case

Western Truckling Company (a US based company) needs to expand its facilities. In order to do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its after tax cost of debt is 5.4%. The terms of lease and purchase plans are as follows.

Lease:
  The leasing arrangement requires beginning of year payment of $16,900 over five years. The lessee will exercise its option to buy the asset for $20,000, to be paid along with the final lease payment.

Purchase:
If the firm purchases the machine, its cost is $80,000 which will be financed with a 5-year, 9% loan (pre-tax). The machine will be depreciated on a straight-line basis for 5 years.   Since the firm own the asset, it has to bear maintenance cost of $3500 yearly.

QUESTIONS

1. Determine the after-cash outflow for Western Trucking under each alternative.

1. Find the present value the after- tax cash outflow for each alternative using the after tax cost of debt.

1. Which alternative-lease or purchase would you recommend? Justify