Carolina Trucking Company (CTC) is evaluating a potential lease agreement from Truck Leasing Co. on a truck that costs $40,000 and falls into 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 $10,000. If CTC 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 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 would pay $40,000 for the truck. The lease payments were $10,000 per year, payable at the beginning of each year to Truck leasing. Truck Leasing is in the 40% tax bracket, and it also forecasts a $10,000 residual value. To furnish the maintenance support, Truck Leasing would have to purchase a maintenance contract at $1,000 per year, payable at the end of each year. Truck Leasing can obtain an expected 10% pre-tax return on investments of similar risk.

1. 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 truck's NPV is negative.

2. What would Truck Leasings NPV of leasing under these conditions?

a. -5,749.65

b. -3,564.18

c. -997.09

d. 1,080.45