What is the net advantage to leasing

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Reference no: EM13727392

Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $50,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 9%, 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 maintiainence, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 30%. What is the net advantage to leasing?

(Note: Assume MACRS rates for years 1-4 are 0.33, 0.45, 0.15, and 0.07.)

Reference no: EM13727392

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