question archive Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class
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Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 25%. What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.15, and 0.07.)
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First, leasing it. We can write off 40% so each payment = 6,000 in total cost.
Lease: 6000+6000/1.06+6000/1.06^2+6000/1.06^3 = 22038.07
Now owning.
Cost now = 40,000.
Maintenance costs us 600 a year due to being able to write off 40%
Depreciation savings will be 40% of value of depreciation. So Y1 = 40000*.3333*.4, Y2 = 40000*.4445*.4, Y3 = 40000*.15*.4, Y4 = 40000*.07*.4. Finally we get 6000 from the sale (4000 is taxes).
Now put it all together in present value terms
40000+(-40000*.33*.4+600)/1.06+(-40000*.45*.4+600)/1.06^2+(-40000*.15*.4+600)/1.06^3+(-40000*.07*.4+600-6000)/1.06^4 = 23035.17
23035.17-22038.07=$996.9 or about $997.
Step-by-step explanation
First, leasing it. We can write off 40% so each payment = 6,000 in total cost.
Lease: 6000+6000/1.06+6000/1.06^2+6000/1.06^3 = 22038.07
Now owning.
Cost now = 40,000.
Maintenance costs us 600 a year due to being able to write off 40%
Depreciation savings will be 40% of value of depreciation. So Y1 = 40000*.3333*.4, Y2 = 40000*.4445*.4, Y3 = 40000*.15*.4, Y4 = 40000*.07*.4. Finally we get 6000 from the sale (4000 is taxes).
Now put it all together in present value terms
40000+(-40000*.33*.4+600)/1.06+(-40000*.45*.4+600)/1.06^2+(-40000*.15*.4+600)/1.06^3+(-40000*.07*.4+600-6000)/1.06^4 = 23035.17
23035.17-22038.07=$996.9 or about $997.
