Treadmill Trucking Co., is negotiating a lease for five new tractor/trailer rigs with Leasing International. Treadmill has received its best offer from Betterbilt Trucks for a total price of $900,000.
The terms of the lease offered by International Leasing call for a payment of $190,000 at the beginning of each year of the 5-year lease. As an alternative to leasing, the firm can borrow from a large insurance company and buy the trucks.
The $900,000 would be borrowed on an amortized term loan at a 10% interest rate for 5 years. The trucks fall into the MACRS 5-year class and have an expected residual value of $90,000. Maintenance costs would be included in the lease.
If the trucks are owned, a maintenance contract would be purchased at the beginning of each year for $8,000 per year. Treadmill plans to buy a new fleet of trucks at the end of the fifth year. Treadmill Trucking has a total tax rate of 20%.
1. Should the firm purchase or lease?
2. Determine the PV of both.
3. Find the NAL