1. 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. 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 30 percent. a. Should the home lease or buy? b. Assume that the lessor is in the 30 percent tax bracket. Further, the lessor's investment alternatives of similar risk yield 8 percent before taxes. Should the lessor write the lease? c. At what lease payment would the lessee be indifferent between owning and leasing? Please show formulas in Excel..

1. 1. 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. 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
30 percent.
a. Should the home lease or buy?
b. Assume that the lessor is in the 30 percent tax bracket. Further, the lessor's investment
alternatives of similar risk yield 8 percent before taxes.
Should the lessor write the lease?
c. At what lease payment would the lessee be indifferent between owning and leasing?
Please show formulas in Excel.