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Furman Industries is negotiating a lease on a new piece of equipment which would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because Furman plans to move to a new facility at that time. It is estimated that the equipment could be sold for $30,000 after 3 years of use. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each of the 3 years of usage. Conversely, Furman could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. Furman is in the 20 percent tax bracket, and it could obtain a loan to purchase the equipment at a before-tax cost of 10 percent. Furman should buy or lease?

Furman Industries is negotiating a lease on a new piece of equipment which would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because Furman plans to move to a new facility at that time. It is estimated that the equipment could be sold for $30,000 after 3 years of use. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each of the 3 years of usage. Conversely, Furman could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. Furman is in the 20 percent tax bracket, and it could obtain a loan to purchase the equipment at a before-tax cost of 10 percent. Furman should buy or lease?

MACRS
Year Factor Depreciation
1 0.33 $ 33,000
2 0.45 45,000
3 0.15 15,000
4 0.07 7,000
1.00 $100,000

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