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 with 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 owning is the purchase price minus the salvage value (which is zero in this case) divided by the number of years, plus the interest cost. The cost of leasing is simply the lease payments. The difference between these two costs gives the net advantage to leasing.

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