Task: evaluate the payoffs from buying the asset versus using it on a lease arrangement.

Given:

• The equipment costs €2000 000
• Interest rate on debt 8%.
• Depreciation MARCS (Modified Accelerated Cost Recovery Sys): 35% first year; 40% second year, 15% third year; and 10% fourth year.
• Marginal tax rate = 30%.
• If the firms buys the equipment, there is a four year maintenance cost of €30 000 payable at the beginning of each year.

If the equipment is leased:

Firm could obtain a 4-year lease which includes maintenance.

Rental payment would be €500,000 at the beginning of each year.

Residual (salvage) value at t = 4:  €200,000.