Assignment 2: Lease vs. Buy
Your employer Barnaby Well Company is considering the acquisition of a new drill truck and your boss has asked you to evaluate the decision that she has made to buy the truck. The truck has a purchase price of $60000 and a useful life of 4 years and a zero salvage value. Barnaby can borrow to buy the truck for $60000 or lease the truck for $15000 for 4 years paid at the beginning of each year.
If debt is used to buy the truck Barnaby can borrow at 8% annual interest with payments at the end of each year. The marginal tax rate for the firm is 40%. The asset is classified as a 3-year cost recovery asset for depreciation purposes. According to the current tax laws Barnaby is allowed to use MACRS depreciation with 30% rate for year one 45% for year two 20% for year three and 5% for year four. There will be no salvage value at the end of the fourth year.
Present your analysis of the assigned problems in Excel format. Enter non-numerical responses in the same worksheet using textboxes.