Janet Wigandt, an electrical engineer for Instrument Control, Inc. (ICI), hasbeen asked to perform a lease-buy analysis on a new pin-inserting machine for ICl's PC-board manufacturing operation. The details of the two options are as follows: Buy option: The equipment costs $120,000. To purchase it, ICI could obtaina term loan for the full amount at 10% interest with four equal annual installments (end-of-year payments). The machine falls into a five-year MACRS property classification. Annual revenues of $200,000 and annual operating costs of $40,000 are anticipated. The machine requires annual maintenance at a cost of $10,000. Because technology is changing rapidly in pin-inserting machinery, the salvage value of the machine is expected to be only $20,000. Lease option: BLI is willing to write a four-year operating lease on theequipment for payments of $44,000 at the beginning of each year. Underthis operating-lease arrangement, BLI will maintain the asset, so the annualmaintenance cost of $10,000 will be saved. ICI's marginal tax rate is 40%,and its MARR is 15% during the analysis period.(a) What is ICl's present-worth (incremental) cost of owning the equipment?(b) What is ICI's present-worth (incremental) cost of leasing the equipment?(c) Should ICI buy or lease the equipment?
Janet Wigandt, an electrical engineer for Instrument Control, Inc. (ICI), has
been asked to perform a lease-buy analysis on a new pin-inserting machine for ICl's PC-board manufacturing operation. The details of the two options are as follows:
Buy option: The equipment costs $120,000. To purchase it, ICI could obtain
a term loan for the full amount at 10% interest with four equal annual installments (end-of-year payments). The machine falls into a five-year MACRS property classification. Annual revenues of $200,000 and annual operating costs of $40,000 are anticipated. The machine requires annual maintenance at a cost of $10,000. Because technology is changing rapidly in pin-inserting machinery, the salvage value of the machine is expected to be only $20,000.
Lease option: BLI is willing to write a four-year operating lease on the
equipment for payments of $44,000 at the beginning of each year. Under
this operating-lease arrangement, BLI will maintain the asset, so the annual
maintenance cost of $10,000 will be saved. ICI's marginal tax rate is 40%,
and its MARR is 15% during the analysis period.
(a) What is ICl's present-worth (incremental) cost of owning the equipment?
(b) What is ICI's present-worth (incremental) cost of leasing the equipment?
(c) Should ICI buy or lease the equipment?
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