H&H Machine Systems Inc. needs to acquire a new lift truck for transporting final products to their warehouse. One alternative is to purchase the lift truck for $40,000, which will be financed by a bank loan at an interest rate of 12%. The loan must be repaid in four equal installments payable at the end of each year. Under the borrow-to-purchase arrangement, H&H would have to maintain the truck al an annual cost of $1,200, payable at year-end. Alternatively, H&H could lease the truck on a four-year contract for a lease payment of $11,000 per year. Each annual lease payment must be made at the beginning of each year. The truck would be maintained by the lessor. The truck falls into the five-year MACRS classification, and it has a salvage value of $10,000, which is the expected market value after four years, at which time H&H plans to replace the truck, regardless of whether the company leases or buys. H&H has a marginaltax rate of 40% and an MARR of 15%.(a) What is H&H's cost of leasing in present worth?(b) What is H&H's cost of owning in present worth?(c) Should the truck be leased or purchased?
H&H Machine Systems Inc. needs to acquire a new lift truck for transporting final products to their warehouse. One alternative is to purchase the lift truck for $40,000, which will be financed by a bank loan at an interest rate of 12%. The loan must be repaid in four equal installments payable at the end of each year. Under the borrow-to-purchase arrangement, H&H would have to maintain the truck al an annual cost of $1,200, payable at year-end. Alternatively, H&H could lease the truck on a four-year contract for a lease payment of $11,000 per year. Each annual lease payment must be made at the beginning of each year. The truck would be maintained by the lessor. The truck falls into the five-year MACRS classification, and it has a salvage value of $10,000, which is the expected market value after four years, at which time H&H plans to replace the truck, regardless of whether the company leases or buys. H&H has a marginal
tax rate of 40% and an MARR of 15%.
(a) What is H&H's cost of leasing in present worth?
(b) What is H&H's cost of owning in present worth?
(c) Should the truck be leased or purchased?
Step by step
Solved in 3 steps with 4 images
