Reference no: EM133123840
You are deciding whether to lease or purchase a car. If you lease the car, your annual payments will be $7,400 for the next four years (due at year end) - these are the only payments related to the lease option and there is no depreciation in this case. If you buy the car, you will pay $30,000 to purchase the car. You estimate the car will have a resale value of $12,000 at the end of four years - again, there is no depreciation in this case. Assume the appropriate discount rate is 10%.
a. Should you lease or buy the car? Hint: calculate the NPV of each option.
b. To answer this question, assume the NPV of the lease cost is $24,000. At what resale value in four years would you be indifferent between buying and leasing? Hint: you are indifferent between two options if they have the same NPV.
c. Instead of buying the car for your personal use, you are buying the car for your business. The annual lease payments of $7,400 can be deducted from taxable income, thus you can treat this as a reduction in your costs and thus will provide you with tax savings. If you purchase the car, you can depreciate the car straight-line to zero book value over four years. The purchase price of the car is $30,000 and the resale value is $12,000. Your marginal corporate tax rate is 40%. If you are acquiring the car for business, should you buy or lease the car?
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: a. Should you lease or buy the car? Hint: calculate the NPV of each option.
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