Ch19-4. Alaska Truck Company (ATC) is evaluating a potential lease for 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 interest is paid at the end of each year and the loan will paid at the end of year 4. 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 ATC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year.
If ATC leases the truck, the lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) paid at the beginning of each year. ATC's tax rate is 40%.
Should the firm lease or buy? In your calculations show the Net Advantage to Leasing.
(Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)
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