Jim owns a lawn care service. He would like to obtain a new heavy duty trailer t
ID: 2508707 • Letter: J
Question
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 Book Value at the end of year 5?
$1,785
$1,028
$1,785
What is the total depreciation benefit [PW(8%)]?
$7,897
$1,839
What is the taxable gains or (loss) tax on the sale of the equipment?
$972
$1260
What is the PW of the net proceeds from the sale?
$3,472
$2,401
What is the total cost of the buy decision?
$4,685
$4,512
Should Jim lease or buy this trailer?
Lease
Buy
$1,028
What is the total economic depreciation benefit for all 5 years? (include taxes)
End of Year
5 year MACRS
Depreciation
Benefit
Tax Benefit @28% tax rate
PW (8%)
1
20%
2
32%
3
19.2%
4
11.52%
5
5.76%
Total Sum
$6,521
$7,897
$1,785
$1,028
$1,785
What is the total depreciation benefit [PW(8%)]?
$7,897
$1,839
What is the taxable gains or (loss) tax on the sale of the equipment?
$972
$1260
What is the PW of the net proceeds from the sale?
$3,472
$2,401
What is the total cost of the buy decision?
$4,685
$4,512
Should Jim lease or buy this trailer?
Lease
Buy
$1,028
Explanation / Answer
Solution 1): Book Value at the end of 5 Year will be ( $8925-$7896)=: $1029 Calculation of tax savings due to depreciation Year Cost of trailer Depreciation rate Depreciation Tax savings @ 28% PW @8% PW of Tax Benefit Solution -2: Total Depreciation benefit will be PW(8%) on tax benefit=$1839 1 $8,925.00 20% $1,785.00 $499.80 0.925926 $462.78 2 $8,925.00 32% $2,856.00 $799.68 0.857339 $685.60 Solution -3: Calculation of Taxable Loss/Gain on sale of Equipment 3 $8,925.00 19.20% $1,713.60 $479.81 0.793832 $380.89 Book Value at the end of 5 year $1,029 4 $8,925.00 11.52% $1,028.16 $287.88 0.73503 $211.60 Salvage Value $4,500 5 $8,925.00 5.76% $514.08 $143.94 0.680583 $97.96 Gain on sale $3,471 $7,896.84 $1,838.83 Tax Expense@28% $971.88 Hence taxable loss on sale of Equipment will be $972. Solution-4 Computation of PV of net Proceed from Sale Salvage Value $4,500 Tax expense $972 Net Proceed $3,528 PVF@8% at the end of 5 year 0.68058 PV of Net Proceed $2,401 Hence PV of Net Proceed will be $2401 Note : As per chegg policy, only 4 sub part can be solved.
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