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A firm wants the use of a machine that costs $100,000. If the firm purchases the equipment it will depreciate the equipment at the rate of $20,000 a year for four years, at which time the equipment will have a residual value of $20,000. Maintenance will be $2,500 a year. The firm could lease the equipment for four years for an annual lease payment of $26,342. Currently, the firm is in the 40 percent income bracket. (Please show all work) a. Determine the firm?s cash inflows and outflows from purchasing the equipment and from leasing. b. If the firm uses a 14 percent cost of funds to analyze decisions that involve payments over more than a year, should management lease the equipment or purchase it? c. Would your answer differ if the cost of funds were 8 percent?

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