17) Jim owns a lawn care service. He would like to obtain a new heavy duty trail
ID: 2508359 • Letter: 1
Question
17) Jim owns a lawn care service. He would like to obtain a new heavy duty trailer to haul his equipment and materials from job to job. He’s found one that will suit his needs. The purchase price is $8,500. Jim is in a 28% tax bracket and sales taxes are 5%. The cost of capital for Jim to purchase the trailer is 8%. The trailer qualifies for 5 year MACRS depreciation method. Jim intends on using the equipment for 60 months. The salvage value of the trailer at the end of the use period is $4500. Jim has also found a dealer that is willing to lease the trailer to him for 60 months for $150 per month. The lease payments would be due at the beginning of the month. Determine if Jim should lease or buy this trailer.
What is the total Lease Payment (include taxes)?
Referencing problem 17...
What is the Book Value at the end of year 5?
Referencing problem 17...
What is the total cost of the buy decision?
$157.50 What is the total economic depreciation benefht for all 5 years? (include taxes) NOTE: You will need to complete this table to answer this question: Depreciation Tax Benefit End of Year 5 year MACRS PW (896) Benefit @28% tax rate 20% 2 32% 19.2% 4 11 .52% 5.76% Total Sum O $6,521 $7,897Explanation / Answer
LEASE COST IS HIGHER THAN BUYING COST SO SHOULD ADOPT TO BUY.
2. What is the total Lease Payment (include taxes)?
Ans) 150+5% tax =$ 157.50 per month
3). What is the total Lease Payment (include taxes)?
ans) $3071 (w.d.v at the end of 5th year)
4) What is the total cost of the buy decision?
ans) $ 4473
YEAR 1 2 3 4 5 TOTAL OPENING W.D.V 8925 7140 4855 3923 3471 LESS DEPRECIATION 1785 2284.8 932 452 400 =8925*20% =7140*32% =4855*19.2% =3923*11.52% =3471*11.52% CLOSING W.D.V 7140 4855.2 3923 3471 3071 TAX SAVING @ 28% 499.8 639.744 261 127 112 1639 P.V.F @ 8% 0.926 0.857 0.794 0.735 0.681 3.993 PRESENT VALUE OF TAX SAVING 463 548 207 93 76 1388 SALVAGE VALUE 4500 P.V. OF SALVAGE 3065 TOTAL BUYING COST 4473 LEASE ANNUAL RENT 1890 TAX SAVING 529 NET ANNUAL RENT 1361 LEASE COST 5771Related Questions
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