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Lease versus purchase JLB Corporation is attemptingto determine whether to lease or purchase researchequipment.

The firm is in the 21% tax bracket, and its after-taxcost of debt is currently 8%. The terms of the lease and of thepurchase are as follows:

Lease Annual end-of-year lease payments of $25,200 arerequired over the 3-year life of the lease. All maintenance costswill be paid by the lessor; insurance and other costs will be borneby the lessee. The lessee will exercise its option to purchase theasset for $5,000 at termination of the lease.

Purchase The research equipment, costing $60,000, canbe financed entirely with a 14% loan requiring annual end-of-yearpayments of $25,844 for 3 years. The firm in this case willdepreciate the equipment under MACRS using a 3-year recoveryperiod. (See Table 4.2 for the applicable depreciationpercentages.) The firm will pay $1,800 per year for a servicecontract that covers all maintenance costs; insurance and othercosts will be borne by the firm. The firm plans to keep theequipment and use it beyond its 3-year recovery period.

a) Calculate the after-tax cash outflows associatedwith each alternative

b) Calculate the present value of each outflow stream,using the after tax cost of debt.

c) Which alternative-lease or purchase-would yourecommend? Why?

please show the work from a to z.