29. Halidane Transfer Inc. is an armored car service that operates in the Chicago area transferring cash between customer locations and various banks. The firm has 22 armored vehicles which are fully utilized serving existing customers. Management recently accepted a new business opportunity that requires two additional vehicles, each of which costs $150,000. Halidane expects to use the new cars for 10 years, but will depreciate them over 5 years for tax purposes.

Assume that tax law dictates the allowable depreciation in each year of the vehicles’

lives as follows.

Halidane can acquire the cars with $300,000 borrowed from its bank at 10% repayable over five years.
Alternately, it can lease both cars for five years from BNI Leasing Inc. for an annual payment of $70,000 with an option to purchase at fair market value at the end of the lease. BNI and Halidane agree that the cars will probably be worth about $30,000 each at that time.
The terms of the lease specify that Halidane will bear the cost of maintenance, property taxes, and insurance on the vehicles. The firm’s marginal tax rate is 40%. Should Halidane lease or buy the new armored cars?

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Year Percent of Original Cost 2 12345 35% 25 20 10 10