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Problem:

Carolina Trucking Company (CTC) 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 9%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $12,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,500 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. CTC's tax rate is 35%.

Required:

Question: What is the net advantage to leasing? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)

a. $642
b. $715
c. $751
d. $609
e. $678

Note: Please answer in proper manner and show all computations

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91170588

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