Problem:
Company B is considering buying a new machine that has an estimated installation cost of $57,000. The machine has an expected life of 5 years and will be depreciated over a 5 year ACRS life to a zero salvage value. It is expected that the machine can be sold at that time for $6,000. If purchased, the entire $57,000 would be borrowed at an interest rate of 9%. A capital budgeting analysis results in a positive NPV for the project. An alternative to purchase is to lease the asset for an annual lease payment of $13,500. The lease includes maintenance services estimated to cost Company C $3,000 per year if they were not included in the lease payment. Company C's cost of capital is 11% and its marginal tax rate is 34%.
Required:
Question 1: Evaluate the purchase and lease options and make a recommendation of which is preferred.
Note: Please provide full description.