Reference no: EM133072897

ABC, a tax-exempt organization, needs a new truck to haul donations to its warehouse. The firm believes, based on its analysis, that this investment adds value.  ABC can borrow funds at 5% and buy the truck for $52,000. Alternatively, Big Leasing Inc. offers to lease a truck to ABC on a five-year lease.  ABC will pay the lessor $12,050 every year at the beginning of each year.  The truck has an estimated pre-tax salvage value of $7,000 after five years.

What is the IRR of the leasing option?  Should ABC lease based on the IRR?

The 5-year MACRS is:

Year   Depreciation (%)

1              20%
2             32
3            19.2
4           11.52
5           11.52
6           5.76