Carolina Trucking Company (CTC) is evaluating a potential lease agreement from Truck Leasing Co. on a truck that costs $40000.00 and falls in the MACRS 3 year class. The loan rate would be 10 percent and would be interest only over the 4 year period, if CTC decided to borrow money and buy the asset rather than lease it. The loan payments would be made at the end of the year. The truck has a 4 year economic life, and its estimated residual value is $10000.00. If CTC buys the truck, it would purchase a maintenance contract that costs $1000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10000.00 lease payment at the beginning of each year. CTC's tax rate is 40 percent.

Now put yourself in the position of Truck Leasing. If truck leasing were to write the lease, it woud pay $40000.00 for the truck. The lease payments were $10000.00 per year, payable at the begining of each year to Truck Leasing. Truck Leasing is in the 40% tax bracket, and it also forecasts a $10000.00 residual value. To Furnish the maintenance support, Truck Leasing would have to purchase a maintnance contract at $1000.00 per year, payable at the end of each year. Truck Leasing can obtain an expected 10%pre tax return on investments of similar risk.

Should the firm (CTC) lease or buy?

a) Lease, it costs $842 less than buying

b) Lease, it costs $997 less than buying

c) Buy, it costs $997 less than leasing.

d) Buy, it costs $842 less than leasing

e) neither lease nor buy, the trucks NPV is negative

What would Truck Leasings NPV of leasing under these conditions?

a) -5749.65

b)-3564.18

c)-997.09

d)1080.45