Reynolds Construction needs a piece of equipment that costs $200. Reynolds can either lease the equipment or borrow $200 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Reynolds’s balance sheet prior to the acquisition of the equipment is as follows: Current assets $300 Debt $400
Net fixed assets 500
Equity 400
Total assets $800
Total claims $800
Assume that Reynolds’s tax rate is 40% and that the equipment’s depreciation would be $100 per year. If the company leased the asset on a 2-year lease, the payment would be $110 at the end of each year. If Reynolds borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. What is the cost of owning?