Question 2

Truck Ltd wants to buy a new truck. The cost of the truck is $80 000. The truck has a useful life of 8 years and is depreciated at $10 000 per year. The truck is expected to have a zero salvage value at the end of its useful life. The corporate tax rate is 20%. Truck Ltd is evaluating the two options below:

1. Truck Ltd can get a bank loan at 8% interest per annum after tax.

2. Truck Ltd is also offered a lease finance option with Toyota, with 4 annual payments of $30 000 to start 4 years from the day the lease is signed.

Required:

Advice Truck Ltd the best option to finance the truck. Show all calculations.