Liberia Company needs a car, which it may lease by paying an initial fee of $200
ID: 2754339 • Letter: L
Question
Liberia Company needs a car, which it may lease by paying an initial fee of $2000, and lease payments for $400 a month in advance for 36 months. The cost of debt for the company is 12% and its tax rate 25%. The company pays its income tax annually. Liberia may also buy the car for $15,000, depreciate it fully over five years, but sell it at some unknown price after three years. Find the selling price of the car that will make buying and leasing to be equivalent. Should the company buy or lease the car? Answer is $1323.45, buy the car Please show work.
Explanation / Answer
On taking the car on lease:
Initial fee = $2000
Annual lease payments = $4800 - interest tax shield 144
= $4656
Present value(12%, 3) of Annual lease payments= $4656 * 2.402 = $11183.71
Total Leasing cost : $13183.71
On buying the Car:
Purchase cost = $15000
Annual tax shield benefit = interest tax shield + depreciation tax shield
= 450 + 750 = $1200
Present value(12%,3) of annual benefits = $1200 * 2.402 = $2882.4
Net Purchase cost after 3 years = 15000 - 2882.4 = $12117.6
As the purchase total cost is less than the leasing total cost, so Liberia Company should choose to BUY CAR.
The selling price of the car after 3 years which equate the purchase and leasing total cost=
= $13183.71 - $12117.6 = $1066.11
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.