3.5 An automobile costing $10,000 is to be used for business purposes. The auto

Question

3.5 An automobile costing $10,000 is to be used for business purposes. The auto has a service life of 3years with no salvage value. Two alternatives are under consideration :

a) Purchase the automobile by obtaining a blank loan(i=0.13), to be repaid in 36 monthly installments.

b) Lease the automobile (in this case all costs are deductible)

You are paying income taxes at a rate or 40 percent. What is the highedst monthly lease cost equicalent to purchase of the auto, if you use ACRS depreciation in case a). Use net present value(i=0.12)

Explanation / Answer

Ans- Calculation of PV of purchase of the auto

Total Cash out flow of purchase=$11481

Yearly Lease equipvalent cost =11481/2.402

=$4720

Monthly Lease equipvalent cost=4720/12

=$398.33

Note-

Installment payment

total interest=10000*3*13/100

=$3900

Total repayment (3900+10000)$13900

Per year installment =13900/3=$4633

Installment Depreciation Total cost Tax saved @40% After tax DF @12% PV OF CASH FLOW 4633 3333 7966 3186 4780 0.893 4268 4633 3333 7966 3186 4780 0.797 3809 4634 3334 7968 3187 4781 0.712 3404 2.402 11481

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