The Big Walnut Company has decided to acquire a new truck. One alternative is to lease the

truck on a $4-$year contract for a lease payment of $$10,000$ per year, with payments to be made at

the beginning of each year. The lease would include maintenance. Alternatively, Big Walnut

could purchase the truck outright for $$40,000,$ financing with a bank loan for the net purchase

price, amortized over a $4-$year period at an annual interest rate of $10\%,$ payments to be made at

the end of each year. Under the borrow$-$to$-$purchase arrangement, Big Walnut would have to

maintain the truck at a cost of $$1,000$ per year, payable at year$-$end. The truck falls into the

MACRS $3-$year class. It has a salvage value of $$10,000,$ which is the expect market value after $4$

years, at which time Big Walnut plans to replace the truck irrespective of whether it leases or

buys. Big Walnut has a federal$-$plus$-$state tax rate of $40\%.$

$[MACRS$: $1Y-33\%,2Y-45\%,3Y-15\%,4Y-7\%]$

a$.$ What is Big Walnut's PV cost of leasing?

b$.$ What is Big Walnut's PV cost of owning?

c$.$ Should Big Walnut purchase or lease? Why?

d$.$ The salvage value is the least certain cash flow in the analysis. How might Big Walnut

incorporate the higher riskiness of this cash flow into the analysis?