Carolina Trucking Company (CTC) is evaluating a potential lease agreement on a truck that costs $40,000 and falls into the MACRS 3-year class. The applicable MACRS depreciation rates are 0.33, 0.45, 0.15, and 0.07. The loan rate would be 10 percent, if CTC decided to borrow money and buy the asset rather than lease it. The truck has a 4-year economic life, and its estimated residual value is $10,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment at the beginning of each year. CTC’s tax rate is 40 percent. Should the firm lease or buy?
Carolina Trucking Company (CTC) is evaluating a potential lease agreement on a truck that costs $40,000 and falls into the MACRS 3-year class. The applicable MACRS depreciation rates are 0.33, 0.45, 0.15, and 0.07. The loan rate would be 10 percent, if CTC decided to borrow money and buy the asset rather than lease it. The truck has a 4-year economic life, and its estimated residual value is $10,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment at the beginning of each year. CTC’s tax rate is 40 percent. Should the firm lease or buy?
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