Firm F needs a new truck. It has two opportunities: either lease or buy.

 The lease contract is 4 years. The before-tax lease payment is 15,000 per year (claimed at the beginning of the year). If firm F leases the truck, it will incur a before-tax operating cost of 1000 in year 1, 2000 in year 2, 3000 in year 3, and 4000 in year 4 (claimed at the end of the year).

The cost of the truck is 100,000. If firm F buys the truck, it will incur a before-tax operating cost of 1500 in year 1, 2500 in year 2, 3500 in year 3, and 4500 in year 4 (claimed at the end of the year). The salvage value of the truck after 4 years is 35,000. Depreciation rate is 20% (claimed at the end of the year)

 The risk-free rate is 4%. The corporate tax rate is 25%.

Fill the table provided below

 UCC = Undepreciated Capital Cost

Depr = Depreciation amount

 Depr Tax Savings = Depreciation Tax Savings

1)

2) Compute the after-tax cash-flows from buying the truck at time 0, 1, 2, 3, and 4 (CFb (0), CFb (1), CFb (2), CFb (3), CFb (4)).

3) Compute the net present value of buying the truck (NP V b )

4) Compute the after-tax cash-flows from leasing the truck at time 0, 1, 2, 3, and 4 (CFl (0), CFl (1), CFl (2), CFl (3), CFl (4)).

5) Compute the net present value of leasing the truck (NP V l )

6) Does firm F choose to buy or lease the truck?
 

Time 0 1 2 3 4 UCC Depr Depr Tax Savings