Delamont Transport Company (DTC) is evaluating the merits of leasing versus purc

Question

Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. (Note: MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741).

Question1: How much is the Year 4 net cash costs if the truck is financed with debt?

a. $11,5743
b. $6,286
c. -$1,574
d. -$5,574

Question2: What is the net advantage to leasing (NAL)?

a. -$1,199
b. $1,199
c. $999
d. -$2,074

Explanation / Answer

Calculation of year 4 cash cost under purchasing option All amounts in Dollars Life of equipment: 4 Tax rate: 40% Loan amount = equipment cost: $40,000 Maintenance costs: $1,000 Interest rate: 10.00% Salvage value: $10,000 Lease Pmt: $10,000 Loan amortization for cash payment and interest expense: Payment: N = 4, I/YR = 10, PV = 40000, FV = 0. PMT = -$12,618.83 Cumulative annuity factor of interest rate of 10% for 4 years = 1/(1+10)4 1/3.1698 0.3155 Loan instalment (Principle amount * 0.3156 ) 12619 All amounts in Dollars Year Beg. Bal. PMT Interest Principal Ending Bal. 1 40,000 12,619 4,000 8,619 31,381 2 31,381 12,619 3,138 9,481 21,900 3 21,900 12,619 2,190 10,429 11,472 4 11,472 12,619 1,147 11,472          0 Loan Analysis All amounts in Dollars A Years 0 1 2 3 4 B MACRS factor 0.3333 0.4445 0.1481 0.0741 C Depreciation ( Cost of the asset*MACRS factor) 13,332 17,780 5,924 2,964 E Loan Pmt -12,619 -12,619 -12,619 -12,619 F Into tax saving (Int. from table ´ T)     1,600     1,255        876        459 G Maintenance -1,000 -1,000 -1,000 -1,000 H Maint. tax saving (Maint. ´ T)        400        400        400        400 I Depr’n tax saving (Deprn ´ T)   5,333   7,112   2,370   1,186 J Net operating CF -6,286 -4,852 -9,973 -11,574 L Salvage value 10,000 M Tax on residual –4,000 O Net residual val                                             6,000 P Total Net CF -6286 -4852 -9973 -5574 Q Present value discount factors at 6% (10-40%) 0.9433 0.8899 0.8396 0.792 R Present value amounts -5929.584 -4317.795 -8373.331 -4414.608 -23035.317 Calculation of year 4 cash cost -5574 Calculations in lease option All amounts in Dollars A Years 0 1 2 3 4 B Lease payment -10,000 -10,000 -10,000 -10,000 0 C Tax saving on pmt   4,000   4,000   4,000   4,000 0 D Net cost of lease -6000 -6000 -6000 -6000 0 E Present value discount factors at 6% (10-40%) 1 0.9433 0.8899 0.8396 F Present value amounts -6000 -5659.800 -5339.400 -5037.600 0 G Total present value amounts -22036.800 Net Advantage of Leasing (23035-22036) -999

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.