Door-to-Door is considering the purchase of a delivery truck costing $61,000. The truck can be leased for 3 years at $22,000 per year or it can be purchased at an interest rate of 8 percent. The estimated life of the truck is 3 years. The corporate tax rate is 35 percent. The company does not expect to owe any taxes for the next several years due to accumulated net operating losses. The firm uses straight-line depreciation. What is the net advantage to leasing?

Question

Quizplus · Accepted Answer

The net advantage to leasing is calculated by comparing the after-tax cost of leasing to the after-tax cost of owning. Since the company does not expect to owe taxes, the tax shield from depreciation is not applicable. The cost of leasing is $22,000 per year for 3 years. The cost of owning includes the purchase price, less any salvage value, and the interest cost. The net advantage to leasing is the difference between these costs, which is $4,304.

Door-To-Door Is Considering the Purchase of a Delivery Truck Costing