Walton Nursing Home (WNH) is evaluating a guideline lease agreement on laundry equipment that costs $250,000 and falls into the MACRS three-year class.
The home can borrow at an 8 percent rate on a four-year loan if WHN decided to borrow and buy rather than lease.
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The laundry equipment has a four-year economic life, and its estimated residual value is $50,000 at the end of Year 4. If WHN buys the equipment, it would purchase a maintenance contract which costs $5,000 per year, payable at the beginning of each year.
The lease terms, which include maintenance, call for a $71,000 lease payment at the beginning of each year.
WNH’s tax rate is 40 percent. Should the home lease or buy?
ANSWER
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