GMS Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 35% tax bracket, and its after-tax cost of debt is currently 7.15%. The terms of the lease and the purchase are as follows. Lease. Annual beginning-of-year lease payments of $93,500 are required over the 3-year life of the lease. The lessee will exercise its option to purchase the asset for $15,000, to be paid along with the final lease payment. Purchase. The $250,000 cost of the research equipment can be financed entirely with a 11% loan (pre-tax). The firm in this case will depreciate the equipment using the straight-line method for three years. The firm plans to keep the equipment and use it beyond its 3-year recovery period.
Calculate the after-tax cash outflows associated with each alternative.
Calculate the present value of each cash outflow stream using the after-tax cost of debt. Round your answers to the nearest whole dollar.
Alternative After-tax Cash Outflows
Lease Purchase
Year 1 _________ ___________
Year 2 _________ ___________
Year 3 _________ ___________
Present Value of the Cash Outflow Stream
Lease Purchase
_________ ____________
Which alternative - lease or purchase - would you recommend?