Jim owns a lawn care service. He would like to obtain a new heavy duty trailer...

Jim owns a lawn care service. He would like to obtain a new heavy duty trailer to haul his equipment and materials from job to job. He’s found one that will suit his needs. The purchase price is $8,500. Jim is in a 28% tax bracket and sales taxes are 5%. The cost of capital for Jim to purchase the trailer is 8%. The trailer qualifies for 5 year MACRS depreciation method. Jim intends on using the equipment for 60 months. The salvage value of the trailer at the end of the use period is $4500. Jim has also found a dealer that is willing to lease the trailer to him for 60 months for $150 per month. The lease payments would be due at the beginning of the month. Determine if Jim should lease or buy this trailer.

1-What is the total economic depreciation benefit for all 5 years? (include taxes)

2-What is the Book Value at the end of year 5?

3-What is the total depreciation benefit [PW(8%)]?

4-What is the taxable gains or (loss) tax on the sale of the equipment?

5-What is the PW of the net proceeds from the sale?

6-What is the total cost of the buy decision?

7-Should Jim lease or buy this trailer?

Expert Solution

Rahul Sunny answered 1 year ago

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