LoTech Welding can purchase a machine for $175,000 and depreciate it as 5-years MACRS property. Annual maintenance would be $9800, and the salvage value after 8 years is $15,000. The machine can also be leased for $35,000 per year on an all costs inclusive lease (maintenance costs included). Le

LoTech Welding can purchase a machine for $175,000 and depreciate it as 5-years MACRS property. Annual maintenance would be $9800, and the salvage value after 8 years is $15,000. The machine can also be leased for $35,000 per year on an “all costs” inclusive lease (maintenance costs included). Lease payments are due at the beginning of each year, and they are tax deductible. The firm’s combined tax rate for state and federal income taxes is 40%.a. If the firm’s after-tax interest rate is 9%, which alternative has the lower EAC and by how much?b. Assume that inflation of 4% applies to the annual maintenance cost and the salvage value, while the lease payments are $35,000 each year not adjusted for inflation.c. Assume that 50% bonus depreciation is also available. How much lower is the annual cost of purchasing the machine? Does this increase or decrease the importance of considering inflation?

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