Reference no: EM132992229

The Olsen Company has decided to acquire a new truck. One alternative is to lease the truck on a four-year contract for a lease payment of $13,000 per year, with payments to be made at the beginning of each year. The lease would include maintenance. Alternatively, Olsen could purchase the truck outright for $55,000, financing with a bank loan for the net purchase price, amortized over a four-year period at an interest rate of 15 percent per year, payments to be made at the end of each year. Under the borrow-to-purchase arrangement, Olsen would have to maintain the truck at a cost of $800 per year, payable at year-end. The truck falls into the MACRS 3-year class. It has a salvage value of $50,000, which is the expected market value after four years, at which time Olsen plans to replace the truck irrespective of whether it leases or buys. Olsen has a marginal tax rate of 40 percent.

Question 1: Should the truck be leased or purchased? Provide your decision based on NPV analysis.