A bulldozer can be purchased for $380,000 and used for 6 years, when its salvage value is 15% of the first cost. Alternatively, it can be leased for $60,000 a year. (Remember that lease payments occur at the start of the year.) The firm's interest rate is 12%.
(a) What is the interest rate for buying versus leasing? Which is the better choice?
(b) If the firm will receive $65,000 more each year than it spends on operating and maintenance costs, should the firm obtain the bulldozer? What is the rate of return for the bulldozer using the best financing plan?