The Prescott Welding Company needs to acquire a new lift truck for transporting its final product to the warehouse. One alternative is to purchase the truck for $45,000, 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 the borrow-to-purchase arrangement, Prescott Welding would have to maintain the truck at an annual cost of $1,200, also payable at year-end. Alternatively, Prescott Welding could lease the truck under a four-year contract for a lease payment of $12,000 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 falls into the five-year MACRS classification, and it has a salvage value of $10,000, which is the expected market value after four years, at which time Prescott Welding plans to replace the truck, irrespective of whether it leases or buys. Prescott Welding has a marginal tax rate of 40% and a MARR of 15%. (a) What is Prescott Welding’s cost of leasing in present worth? (b) What is Prescott Welding’s cost of owning in present worth? (c) Should the truck be leased or purchased? Note: This is an operating lease, so the truck would be maintained by the lessor
The Prescott Welding Company needs to
acquire a new lift truck for transporting its final product to the warehouse. One alternative is to purchase
the truck for $45,000, 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 the borrow-to-purchase arrangement, Prescott Welding would have to maintain the
truck at an annual cost of $1,200, also payable at
year-end. Alternatively, Prescott Welding could lease
the truck under a four-year contract for a lease payment of $12,000 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 falls into the five-year MACRS classification,
and it has a salvage value of $10,000, which is the
expected market value after four years, at which time
Prescott Welding plans to replace the truck, irrespective of whether it leases or buys. Prescott Welding
has a marginal tax rate of 40% and a MARR of 15%.
(a) What is Prescott Welding’s cost of leasing in
present worth?
(b) What is Prescott Welding’s cost of owning in
present worth?
(c) Should the truck be leased or purchased?
Note: This is an operating lease, so the truck would
be maintained by the lessor
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