Jim owns a lawn care service. He would like to obtain a new heavy duty trailer to haul his equipmentand 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 is8%. The trailer qualifies for 5 year MACRS depreciation method. Jim intends on using the equipmentfor 60 months.
The salvage value of the trailer at the end of the use period is $4500. Jim has alsofound a dealer that is willing to lease the trailer to him for 60 months for $150 per month. The leasepayments would be due at the beginning of the month. Determine if Jim should lease or buy thistrailer.
1. What is the total Lease Payment (include taxes)?
a.$150
b.$157.50
2. What is the net after-tax monthly lease expense?
a. $113.40
b.$44.10
3. What is the PW (8/12%) of the lease?
a.$5630
b.$5462
4. What is the total up-front cash payment?
a.$8500
b.$8925
5. What is the total economic depreciation benefit for all 5 years? (include taxes)
a.$6521
b.$7897
6. What is the Book Value at the end of year 5?
a. $1785
b. $1028
7. What is the total depreciation benefit [PW(8%)]?
a.$7897
b.$1922
8. What is the taxable gains tax on the sale of the equipment?
a.$972
b.$1260
9. What is the PW of the net proceeds from the sale?
a.$3472
b.$2401
10. What is the total cost of the buy decision?
a.$4602
b.$4500
11. Should Jim lease or buy this trailer?
a.Lease
b.Buy