Answer Happy

Michael Cleaners needs a new steam finishing machine that costs
$100,000. The company is evaluating whether it should lease or
purchase the machine. The equipment falls into the MACRS 3-year
class, and it would be used for 4 years and then sold, because the
firm plans to move to a new facility at that time. The estimated
value of the equipment after 4 years is $10,000. A maintenance
contract on the equipment would cost $3,000 per year, payable at
the beginning of each year. Alternatively, the firm could lease the
equipment for 4 years for a lease payment of $29,000 per year,
payable at the beginning of each year. The lease would include
maintenance. Due to special circumstances, the firm is in the 20%
tax bracket, and it could obtain debt at a before-tax cost of 10%.
If there is a positive Net Advantage to Leasing the firm will lease
the equipment. Otherwise, it will buy it. MACRS rates for Years 1
to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.
What is the difference in cash flow at inception (Buying
Cash flow compared to Leasing Cash flow) - ignore cash inflow of
any external debt on the buy-side?
a. Buying cash out flow $59,200 higher than leasing cash
flow
b. Buying cash out flow $71,000 higher than leasing cash
flow
c. Buying cash out flow $79,200 higher than leasing cash
flow
d. Buying cash out flow $74,000 higher than leasing cash
flow