Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firmâs brokers. The system also permits customers to call up current quotes on terminals in the lobby. The equipment costs and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a interest rate. Although the equipment has a useful life, it is classified as a special-purpose computer and therefore falls into the MACRS class. If the system were purchased, a maintenance contract could be obtained at a cost of , payable at the beginning of each year. The equipment would be sold after , and the best estimate of its residual value is . However, because real-time display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a guideline lease on the equipment, including maintenance, for payments of at the beginning of each year. Lewisâs marginal federal-plus-state tax rate is . You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions. c.What is Lewisâs present value cost of leasing the equipment? (Hint: Again, construct a time line.)
Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firmâs brokers. The system also permits customers to call up current quotes on terminals in the lobby. The equipment costs and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a interest rate. Although the equipment has a useful life, it is classified as a special-purpose computer and therefore falls into the MACRS class. If the system were purchased, a maintenance contract could be obtained at a cost of , payable at the beginning of each year. The equipment would be sold after , and the best estimate of its residual value is . However, because real-time display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a guideline lease on the equipment, including maintenance, for payments of at the beginning of each year. Lewisâs marginal federal-plus-state tax rate is . You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions. c.What is Lewisâs present value cost of leasing the equipment? (Hint: Again, construct a time line.)
