Delmont Transport Company (DTC) is evaluating the merits of leasing versus purchasing 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 10%, and the loan would be amortized over the truck's 4-year
life, so the interest expense for taxes would decline over time. 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 $10,000. If DTC buys the truck, it would purchase a maintenance
contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include
maintenance, call for a $10,000 lease payment at the beginning of each year (i.e. 4 payments total).
DTC's tax rate is 40%.
What is the net advantage to leasing?
(Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)

Samaresh Chhotray ( CA,MBA, Masters in Finance)

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