Problem:

Your small business needs to buy new office furniture for your new headquarters. You have the option of leasing the furniture, or buying the furniture. You can purchase the furniture for $15,000 per year, or lease the same furniture for $5,000 per year for the next four years. Your company has a marginal tax rate of 40%. Depreciation will amount to $3,750 per year and the furniture will be replaced after 4 years. If your company buys the furniture, they will borrow at 7%.

Required:

Question: Calculate the total cost for both options. Leasing vs. buying: which is the best option for your small business and why?

Note: Be sure to show how you arrived at your answer.