Question
Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs EGP 40,000 and falls into the MACRS
Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs EGP 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 EGP 10,000. If DTC buys the truck, it would purchase a maintenance contract that costs EGP 1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for an EGP 10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. What is the NAL (net advantage to leasing)? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)
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