The Box Store is considering the purchase of a delivery truck costing $49,000. The truck can be leased for three years at $19,500 per year or it can be purchased at an interest rate of 7.5 percent. The estimated life of the truck is three years. The corporate tax rate is 21 percent. The company does not expect to owe any taxes for the next several years due to large operating losses. The firm uses straight-line depreciation. What is the net advantage to leasing?
A) -$1,710
B) -$864
C) $1,304
D) −$1,006
E) $1,794

Question

The Box Store is considering the purchase of a delivery truck costing $49,000. The truck can be leased for three years at $19,500 per year or it can be purchased at an interest rate of 7.5 percent. The estimated life of the truck is three years. The corporate tax rate is 21 percent. The company does not expect to owe any taxes for the next several years due to large operating losses. The firm uses straight-line depreciation. What is the net advantage to leasing?
A) -$1,710
B) -$864
C) $1,304
D) −$1,006
E) $1,794

Quizplus · Accepted Answer

The net advantage to leasing is -$1,710. This is because the present value of the lease payments is $50,710, while the present value of the purchase price is $52,420.

The Box Store Is Considering the Purchase of a Delivery