In 2017, a certain manufacturing company has some existing semi-automated production equipment which they are considering replacing. This equipment has a present market value of $57,000 and a book value of $30,000. It has five more years of straight-line depreciation available (if kept) of $6,000 per year, at which time its book value would be zero. The estimated market value of the equipment five years from now (in year 0 dollars) is $18,500. The market value escalation rate on this type of equipment has been averaging 3.2% per year. The total annual operating and maintenance (O & M) expense and other related expenses are averaging $27,000 per year.
New automated replacement equipment would be leased. Estimated O & M and related company expenses for the new equipment are $12,200 per year. The annual leasing costs would be $24,300. The MARR (after-tax including inflation component) is 9%, the effective tax rate is 40%, and the study period is five years. Based on an after-tax, A$ analysis, should the new equipment be leased? Use the IRR method.