Problem

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 economic depreciation benefit for all 5 years? (include taxes) $6521 $7897

What is the Book Value at the end of year 5? $1785 $1028

What is the total depreciation benefit [PW(8%)]? $7897 $1839

What is the taxable gains tax on the sale of the equipment? $972 $1260

What is the PW of the net proceeds from the sale? $3472 $2401

What is the total cost of the buy decision? $4685 $4500

Should Jim lease or buy this trailer? Lease Buy.