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

17) 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.

What is the total Lease Payment (include taxes)?

$157.50

Referencing problem 17...

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

$1,785

$1,028

Referencing problem 17...

What is the total cost of the buy decision?

$4,685

$4,512

Solutions

Expert Solution

YEAR	1	2	3	4	5	TOTAL
OPENING W.D.V	8925	7140	4855	3923	3471
LESS DEPRECIATION	1785	2284.8	932	452	400
	=8925*20%	=7140*32%	=4855*19.2%	=3923*11.52%	=3471*11.52%
CLOSING W.D.V	7140	4855.2	3923	3471	3071
TAX SAVING @ 28%	499.8	639.744	261	127	112	1639
P.V.F @ 8%	0.926	0.857	0.794	0.735	0.681	3.993
PRESENT VALUE OF TAX SAVING	463	548	207	93	76	1388


SALVAGE VALUE		4500
P.V. OF SALVAGE		3065

TOTAL BUYING COST		4473

LEASE
ANNUAL RENT	1890
TAX SAVING	529
NET ANNUAL RENT	1361
LEASE COST	5771

LEASE COST IS HIGHER THAN BUYING COST SO SHOULD ADOPT TO BUY.

2. What is the total Lease Payment (include taxes)?

Ans) 150+5% tax =$ 157.50 per month

3). What is the total Lease Payment (include taxes)?

ans) $3071 (w.d.v at the end of 5th year)

4) What is the total cost of the buy decision?

ans) $ 4473

ekkarill92 answered 1 year ago

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