Question 13

Recovery Centers of America needs to acquire new vehicles that will cost $2.5 million across its six state service area. It plans to use the vehicles for three years, at which time new vehicles will be acquired. The company can obtain a 3.49 percent bank loan to buy the vehicles or it can lease the vehicles for three years. Assume that the following facts apply to the decision:

- The vehicles fall into the five-year class for tax depreciation, so the MACRS allowances are 0.2, 0.32, 0.19, 0.12, 0.11, and 0.06 in Years 1 through 6, respectively.

- The company's marginal tax rate is 28 percent.

- Tentative lease terms call for payments of $550,000 at the end of each year.

- The best estimate for the value of the vehicles after three years of wear and tear is $1,350,000.

Tax rate Year Allowance

28% 1 20%

2 32%

3 19%

4 12%

5 11%

6 6%