Delamont Transport Company (DTC)is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class.If the firm borrows and buys the truck,the loan rate would be 10%,and the loan would be amortized over the truck's 4-year life,so the interest expense for taxes would decline over time.The loan payments would be made at the end of each year.The truck will be used for 4 years,at the end of which time it will be sold at an estimated residual value of $10,000.If DTC 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 (4 payments total)at the beginning of each year.DTC's tax rate is 40%.What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333,0.4445,0.15,and 0.07. )
A) $849
B) $896
C) $945
D) $999
E) $1,047

Question

Quizplus · Accepted Answer

The Answer of Delamont Transport Company (DTC)is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class.If the firm borrows and buys the truck,the loan rate would be 10%,and the loan would be amortized over the truck's 4-year life,so the interest expense for taxes would decline over time.The loan payments would be made at the end of each year.The truck will be used for 4 years,at the end of which time it will be sold at an estimated residual value of $10,000.If DTC 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 (4 payments total)at the beginning of each year.DTC's tax rate is 40%.What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333,0.4445,0.15,and 0.07. )
A) $849
B) $896
C) $945
D) $999
E) $1,047

Delamont Transport Company (DTC)is Evaluating the Merits of Leasing Versus