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H&H Machine Systems Inc. needs to acquire a new lift truck for transporting final products to their warehouse. One alternative is to purchase the lift

H&H Machine Systems Inc. needs to acquire a new lift truck for transporting final products to their warehouse. One alternative is to purchase the lift truck for $40,000, which will be financed by a bank loan at an interest rate of 12%. The loan must be repaid in four equal installments payable at the end of each year. Under the borrow-to-purchase arrangement, H&H would have to maintain the truck at an annual cost of $1,200 payable at year-end. Alternatively, H&H could lease the truck on four-year contract for a lease payment of $11,000 per year. Each annual lease payment must be made at the beginning of each year. The truck would be maintained by the lessor. The truck falls into the five- year MACRS classification, and it has a salvage value of $10,000, which is the expected market value after four years, at which time H&H plans to replace the truck, regardless of whatever the company leases or buys. H&H has a marginal tax rate of 40% and an MARR of 15%.

(a) What is H&Hs cost of leasing in present worth?

(b) What is H&Hs cost of owning in present worth?

(c) Should the truck be owned or purchased?

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