The Jacob Company needs to acquire a new lift truck for transporting its final product to the warehouse. One alternative is to purchase the lift truck for $40,000, which will be financed by the bank at an interest rate of 12%.
The loan must be repaid in four equal installments, payable at the end of each year. Under this borrow-to-purchase arrangement, Jacob would have to maintain the truck at a cost of $1200 payable at year-end.
Alternatively, Jacob could lease the truck on a 4-year contract for a lease payment of $11,000 per year. Each annual lease payment must be made at the beginning of each year.
The truck would be maintained by the lessor. The truck is a class 10 asset with a CCA rate of 30%; its expected market value after 4 years is $10,000.
At that time Jacob plans to replace the truck irrespective of whether it leases or buys. Jacob has a marginal tax rate of 40% and a MARR of 15%.
(a) What is Jacob's present equivalent cost of leasing?
(b) What is Jacob's present equivalent cost of owning?
(c) Should the truck be leased or purchased?