Fireplaces and More is considering the purchase of a delivery truck costing $29,000. The truck will be used for 5 years and then it will be worthless. The financing rate for the purchase is 7.5 percent and the corporate tax rate is 32 percent. The firm uses straight-line depreciation. What is the break-even lease payment amount?

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Quizplus · Accepted Answer

Depreciation tax shield = ($29,000/5) (0.32) = $1,856Discount rate = 0.075 (1 - 0.32) = 5.10 percent$29,000 = C(PVIFA_{5.10%, 5}); C = $6,716.80Break-even lease payment = ($6,716.80 - $1,856)/(1 - 0.32) = $7,148

Fireplaces and More Is Considering the Purchase of a Delivery