Question
A florist can purchase a delivery truck from her local GM dealer for $25,000. The GM dealer will also lease the truck for $6,100 per
A florist can purchase a delivery truck from her local GM dealer for $25,000. The GM dealer will also lease the truck for $6,100 per year over five years. The truck has an expected life of seven years. The truck is expected to be worth $2,500 (after-tax) in five years and the florist has the option to buy it at fair market value at that time. If the florist wants to purchase the truck, she must borrow the money from Simple Loans Bank at a current rate of 10%. The florists tax rate is 34%. For simplicity assume straight-line depreciation a) Find out the incremental cash flows for the leasing decision with and without salvage value b) Which financing option is better (with and without salvage value)? c) What would be the break-even before-tax lease rental with and without salvage value?
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