Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, 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 maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax
rate is 25%. What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.15, and 0.07.)
A. $1,020
B. $1,075
C. $1,134
D. $1,197
E. $1,257
Answer: D
You might also like to view...
Business in the Middle East is primarily driven by the price of steel
Indicate whether the statement is true or false
What are the two types of locus of control?
A. reciprocal and outermost B. interior and exterior C. internal and reciprocal D. internal and external
An organizational structure in which each person reports to one supervisor is called a ________ organization.
A. line B. staff C. flat D. smooth
Workman Company is considering a five-year project that requires a typical investment in working capital, in this case, $100,000. Consider the following statements about this situation:I. Workman should include a $100,000 outflow that occurs at time 0 in a discounted-cash-flow analysis. II. Workman should include separate $100,000 outflows in each year of the project's five-year life. III. Workman should include a $100,000 recovery of its working-capital investment in year 5 of a discounted-cash-flow analysis. Which of the above statements is (are) correct?
A. I only. B. III only. C. I and III. D. II only. E. I and II.