IEE 6060

Buy vs Lease

Your company is considering replacing a 1000 pound capacity forklift truck. The company is considering buying or leasing the truck. It is also considering borrowing money to buy the truck.

The cost of a new truck is $20,000. The expected life is 4 years and an engine overhaul will be required at the end of 2 years that will cost $1500. The truck vendor offers a maintenance contract to service the truck for $1440 per year. Insurance and taxes for the truck are $650 per year. The truck is classified as 5 year MACRS property. You believe you can sell the truck at the end of 4 years for $3000.

The vendor has a lease plan. Under the plan the vendor will maintain the truck and provide a replacement if the truck needs repair. The cost of the lease is $$10,200 per year. The company wants to earn a 12% after tax return on its money. The tax rate is 40%.

Should you purchase or lease the truck? If purchased, should money be borrowed to finance the purchase? The interest rate on borrowed money is 10%. Management wants to know how sensitive this decision is to changes in the debt ratio and the interest rate. Construct a table showing the NPV vs debt ratio with the debt ratio ranging 0 to 100%.

The new tax laws may allow the entire first cost of the forklift to be expensed at the end of the first year. Redo the analysis if the forklift is expensed.

Your company is considering replacing a 1000 pound capacity forklift truck. The company is considering buying or leasing the truck. It is also considering borrowing money to buy the truck. The cost of a new truck is $20,000. The expected life is 4 years and an engine overhaul will be required at the end of 2 years that will cost $1500. The truck vendor offers a maintenance contract to service the truck for $1440 per year. Insurance and taxes for the truck are $650 per year. The truck is classified as 5 year MACRS property. You believe you can sell the truck at the end of 4 years for $3000. The vendor has a lease plan. Under the plan the vendor will maintain the truck and provide a replacement if the truck needs repair. The cost of the lease is $10,200 per year. The company wants to earn a 12% after tax return on its money. The tax rate is 40%. Should you purchase or lease the truck? If purchased, should money be borrowed to finance the purchase? The interest rate on borrowed money is 10%. Management wants to know how sensitive this decision is to changes in the debt ratio and the interest rate. Construct a table showing the NPV vs debt ratio with the debt ratio ranging 0 to 100%. The new tax laws may allow the entire first cost of the forklift to be expensed at the end of the first year. Redo the analysis if the forklift is expensed