Donald is in the real estate business. He wants to acquire an Audi A8 for use in his business for four years, and asks you for an analysis determining whether he should purchase or lease the Audi.

Information regarding the car:

Purchase Option:

Cost

$85,000

Estimated residual value, 3 years

$40,000

Annual interest rate

3.5%

Down Payment

$0

Annual, end-of-year (for simplicity) loan payments

$30,339

Lease Option:

Down Payment

$0

Annual, end-of-year (for simplicity) lease payments

$17,000

REQUIRED: Prepare an Excel spreadsheet depicting discounted cash-flow analyses of the two options to determine if Donald would minimize the present value of his after-tax costs by purchasing or leasing the Audi. In making your calculations, assume the following:

Donald is in the 32% marginal tax bracket for all years;

Car is 100% business use;

January 1 decision date;

6% discount rate to compute the present value of future cash flows;

If Donald purchases the auto

Use the 2019 depreciation limits for passenger autos in Rev Proc 2019-26;

He will sell it at the end of 3 years for the estimated residual value quoted above;

Hint: you'll need to compute a loan amortization table for the interest deduction;

Since we haven't covered this yet, the sale of a business vehicle generates ordinary income/loss.

If Donald leases the auto:

Use the 2019 lease inclusion amounts for passenger autos in Rev Proc 2019-26;

He will return the auto at the end of the lease; ignore any possible mileage limits.