Question

JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 21% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows:

LEASE Annual end-of-year lease payments of $25,200 are required over the three-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at termination of the lease.
PURCHASE The equipment costs $60,000 and can be financed with a 14% loan requiring annual end-of-year payments of $25,844 for three years.

Answer 1

The question requires an analysis of whether JLB Corporation should lease or purchase research equipment, considering annual payments, tax effects, and the cost of capital. The lease involves lower payments but includes a final purchase option, while buying requires higher loan payments.

Step-by-step explanation:

Lease vs. Purchase Analysis for JLB Corporation

JLB Corporation must decide whether to lease or purchase research equipment. This is a common financial consideration that businesses must address, involving an analysis of cost, tax implications, and the cost of capital. The choice depends on the total costs over the asset's life, considering all payments and tax effects.

Lease Considerations

Leasing involves annual end-of-year payments of $25,200 for three years, with an option to purchase for $5,000 after the lease ends. Maintenance is covered by the lessor, but insurance and other costs fall to JLB. The tax implications in the 21% bracket and the 8% after-tax cost of debt need to be considered.

Purchase Considerations

If JLB purchases, they face a 14% loan with annual payments of $25,844 for three years. The upfront cost is $60,000, and this option must be evaluated against the leasing terms.