Explore BrainMass
Share

Lease vs Buy analysis

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Please use Excel.

(Net advantage to leasing) Lake Trolley Company is considering whether to lease or buy a new trolley that costs $25,000. The trolley can be depreciated straight line over an eight-year period to an estimated residual value of $5,000. Lake Trolley's cost of eight-year secured debt is 12%. Its required return for the project is 16% after tax and 20% pretax. National Trolley Leasing Corporation has offered to lease the trolley to Lake Trolley in return for annual payments of $5,000 payable at the end of each year.
a. Specify the incremental cash flow stream associated with the lease, assuming Lake Trolley's marginal income tax rate is 40%.
b. Calculate the net advantage to leasing, assuming Lake Trolley's tax rate is 40%. Should Lake Trolley lease, or borrow and buy?
c. Calculate the net advantage to leasing, assuming Lake Trolley's tax rate is zero. Should Lake Trolley lease, or borrow and buy?
d. How would your answers to parts b and c change if the residual value at the end of eight years is $500, but the trolley is depreciated to $5,000?

© BrainMass Inc. brainmass.com October 17, 2018, 1:27 am ad1c9bdddf
https://brainmass.com/business/leasing/lease-vs-buy-analysis-338362

Solution Summary

Caaries out lease vs buy analysis.

$2.19
Similar Posting

Hard Removals: Analysis of Lease or Buy option for a new truck

I don't understand how to incorporate the 70% owner's equity and 30% debt into the calculation. Can you please provide me step by step instructions on how to solve this question correctly or provide me with the solutions so I can verify it where I went wrong.

The firm, Hard Removals, is operated by a sole proprietor, and is considering the purchase of a new truck to haul its large rubbish removal skips. The firm is presently financed by a mix of 70% owner's equity and 30% debt, the after tax cost of capital being 12%. Pertinent details are given below:

Acquisition price of truck $ 20,000
Useful life 4 years
Salvage value (estimate) $ 4,000
Depreciation method, down to zero book value Straight line
Annual cash savings from the truck, before tax and depreciation
$ 10,000
Rate of interest on a 4 year term loan 10% pa
Marginal tax rate 47%
Annual lease rentals (4 years) payable at the beginning of each year
$ 6,000
Residual lease value $ 7,000
Annual operating expenses paid by lessor $ 1,000

a. Evaluate whether or not the truck acquisition is justified as an investment project.
b. Should Hard Removals lease or buy the truck?

View Full Posting Details