Quantitative Problem : Findley Furniture Company must install $6.1 million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply:
The equipment falls in the MACRS 5-year class. The applicable MACRS rates are 18%, 32%, 17%, 12%, 11%, and 10%.
The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for $160,000 per year, payable at the end of the year.
Findley’s federal-plus-state tax rate is 35%.
If the money is borrowed, the bank loan will be at a rate of 9%, amortized in 5 equal installments to be paid at the end of each year.
The tentative lease terms call for end-of-year payments of $1.15 million per year for 5 years.
At the end of the lease term, the equipment will have an estimated salvage value of $900,000. At that time, Findley plans to replace the equipment regardless of whether the firm leases or purchases it.
What is the firm’s cost of owning the equipment? Round your answer to the nearest thousand dollars.