Reference no: EM13834462

General Assignment:

The Dallas Electronics Company is considering replacing an old, 1,000-pound-capacity industrial forklift truck. The truck has been used primarily to move goods from production machines into storage. The company is working nearly at capacity and is operating on a two-shift basis six days per week. Dallas management is considering owing or leasing the new truck. The plant engineering has complied the following data for management:

- The initial cost of a gas-powered truck is $20,000.The new truck would use about 8 gallons of gasoline (in a single shift of 8 hours per day) at a cost of $2.35 per gallon. If the truck is operated 16 hours per dayits expected life will be four years, and an engine overhaul at a cost of $1,500 will be required at the end of two years.

- The Austin Industrial Truck Company was servicing the old forklift truck, and Dallas would buy the new truck through Austin, which offers a service agreement to users of its trucks. The agreement costs $120 per month and provides for a monthly visit by an experienced service representative to lubricate and turn the truck. Insurance and property taxes for the truck are $650 per year.

- The truck is classified as five-year property under MACRS and will be depreciated accordingly. Dallas is in the 40% marginal tax bracket; the estimated resale value of the truck at the end of four years will be 15% of the original cost.

- Austin also has offered to lease a truck to Dallas. Austin will maintain the equipment and will guarantee to keep the truck in serviceable condition at all times. In the event of a major breakdown, Austin will provide a replacement truck at its expense. The cost of the operating lease plan is $850 per month, paid at the beginning of each month. The contract term is three years at a minimum, with the option to cancel on 30 days notice thereafter.

- On the basis of recent experiences, the company expects that funds committed to new investments should earn at least a 12% rate of return after taxes.

Answer the following questions:

2. Compare the after-tax EUAC of owning versus leasing the truck, which one would you recommend to Dallas?

3. If Dallas decides to purchase the truck, it would go with 100% financing at a 12% interest rate and use payment plan 3, to pay off the debt in 4 years. Calculate the after-tax present value of owning the truck. Would you change your recommendation in question 2?

 

This is all that i am given: What i know, is that we disregard the gas cost because , both the leasing and buying options will require you to fill your own tank.