Leasing

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%.

(a) Fill the table provided below.

UCC = Undepreciated Capital Cost

Depr = Depreciation amount

Depr Tax Savings = Depreciation Tax Savings

Time	0	1	2	3	4
UCC
Depr
Depr Tax Savings

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

(c) Compute the net present value of buying the truck (NPV^b ).

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

(e) Compute the net present value of leasing the truck (NPV^l)

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