Answer Happy

Eco-Systems, Inc. is a Lincoln, Nebraska-based manufacturer of
efficient, renewable energy
options for government units at all levels (i.e., federal, state,
county, city), as well as private
corporations and firms of all sizes. To meet customer demand for
solar panels, Eco-Systems is
considering a new, more technologically-advanced solar panel
fabricating machine for its
Lincoln, Nebraska manufacturing facility. To finance the cost of
the solar panel fabricating
machine, Eco-Systems has two options: 1) Buy: Eco-Systems could
borrow funds from the
Nebraska Farmers & Merchants State Bank in Lincoln to fund the
full cost of the fabricating
machine; or, 2) Lease: Eco-Systems could lease the fabricating
machine from the equipment
vendor.
As the Finance representative on the management team of
Eco-Systems, you have been asked
to complete the lease vs. buy analysis for the solar panel
fabricating machine. After talking with
the vendor of this machine and Eco-Systems’ bank, and after
reviewing the in-house financial
documents of Eco-Systems, you have assembled the following
information for this analysis:
 If purchased, the cost at t = 0 of the solar panel fabricating
machine is $1,500,000.
 Whether Eco-Systems decides to lease or buy the machine,
Eco-Systems will be
responsible for the insurance, property tax, and maintenance costs
for the machine.
 Eco-Systems has a 40% effective income tax rate.
 If purchased, Eco-Systems would depreciate the machine using the
3-year class
Modified Accelerated Cost Recovery System (MACRS) depreciation
rates.
 If purchased, a loan for 100% of the cost of the machine can be
obtained from Nebraska
Farmers & Merchants State Bank, at an interest cost of 15% per
year. The loan is non-
amortizing and would have a 4-year life. Given this, Eco-Systems
would then pay
“Interest Expense” on the $1,500,000 loan principal on December 31
in each of the 4
years that the loan is outstanding. The $1,500,000 loan principal
would be repaid to the
Bank at the conclusion of the loan term, on December 31, Year
4.
 If leased, Eco-Systems would make a $400,000 lease payment at the
end of each of the 4
years during the lease term.
 The solar panel fabricating machine will not be used by
Eco-Systems after December 31,
Year 4. However, on that date (Dec. 31, Year 4), the machine is
assumed to have an
estimated residual value of $250,000, for which it will be sold on
that date.
Given this information, please complete the following questions
about this lease vs. buy
situation that Eco-Systems is facing:
1. What is the Net Present Value (NPV) of the solar panel
fabricating machine if purchased and
depreciated over the 4-year term?
2. What is the Present Value (PV) of the cost of leasing the solar
panel fabricating machine for
the 4-year lease term?
3. Given your calculations for owning the machine in Question #1
and your calculations for
leasing the machine in Question #2, what is the “Net Advantage to
Leasing” (NAL) for this
situation?
4. Do you recommend that Eco-Systems lease or buy the solar panel
fabricating machine?
Please describe.