Problem 3

A company is considering the replacement of its delivery vehicle. There are two options available:

1. The cost of the vehicle is $15 000. If the company purchases the vehicle, it will be entitled to paying tax depreciation (wear and tear) at the rate of 50%, 30% and 20%. The vehicle is expected to a have a trade in value of $5000.00 at the end of 3 years.

2. If the company leases the vehicle it will make an initial payment of $1 250 plus annual payments of $4992 at the end of each of the 3 years. The full value of each lease payment will be an allowance cost in the computation of the companys taxable profits of the year in which the payments are made.

3. The company corporate tax rate is 30%. 50% of all taxes is payable at the end of the year and the other 50% balance in the following year.

Required:

Determine whether the company should purchase or lease the vehicle, clearly stating your recommendations to the company