Question
The RTC has decided to acquire a new truck One alternative is to lease the truck on a 4-yeas guideline contract for a lease payment
The RTC has decided to acquire a new truck One alternative is to lease the truck on a 4-yeas guideline 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, RTC could purchase the truck outright for $40,000, financing the purchase by a bank loan for the net purchase price and amortizing the loan over a 4-year period at an interest rate of 10% per year. Under the borrow-to-purchase arrangement, RTC 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 residual value of $10,000, which is the expected market value after 4 years when RTC plans to replace the truck irrespective of whether it leases or buys. RTC has a marginal federal-plus-state tax rate of 40%. a. What is the RTC's present value of leasing? b. What is RTC's present value of owning? Should the truck be leased or purchased?
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