A florist can purchase a delivery truck from her local GM dealer for $25,000. The GM...

A florist can purchase a delivery truck from her local GM dealer
for $25,000. The GM dealer will also lease the truck for $6,100
per year over five years. The truck has an expected life of seven
years. The truck is expected to be worth $2,500 (after‐tax) in five
years and the florist has the option to buy it at fair market value
at that time.
If the florist wants to purchase the truck, she must borrow the
money from Simple Loans Bank at a current rate of 10%. The
florist’s tax rate is 34%. For simplicity assume straight‐line
depreciation

(a) Find out the incremental cash flows for the leasing decision with and without salvage value

(b) Which financing option is better (with and without salvage
value)?

(c) What would be the break‐even before‐tax lease rental with
and without salvage value?

Expert Solution

jeff jeffy answered 9 months ago

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