The Oliver Corporation has decided to acquire a new truck. One alternative is to lease the truck on a 4-year contract for a lease payment of $12,000 per year, with payments to be made at the beginning of each year. The lease would include maintenance. Alternatively, Oliver could purchase the truck outright for $48,000, financing with a bank loan for the net purchase price, amortized over a 4-year period at an interest rate of 12 percent per year, payments to be made at the end of each year. Under the borrow-to-purchase arrangement, Oliver would have to maintain the truck at a cost of $1,500 per year, payable at year-end. The truck falls into the MACRS 3-year class. The applicable MACRS depreciation rates are 33, 45, 15, and 7 percent. It has a salvage value of $12,000, which is the expected market value after 4 years, at which time Oliver plans to replace the truck irrespective of whether it leases or buys. Oliver has a federal-plus-state tax rate of 40 percent. Based on this information answer the following questions:

(a) What is Olivers PV cost of leasing?

(b) What is Olivers PV cost of owning? Should the truck be leased or purchased?

(c) The appropriate discount rate for use in Olivers analysis is the firms after-tax cost of debt. Why?

(d) The salvage value is the least certain cash flow in the analysis. How might Oliver incorporate the higher riskiness of this cash flow into the analysis?