8.4. Turnberry Trucking Service would like to acquire 400 vans for its business.

Question

8.4. Turnberry Trucking Service would like to acquire 400 vans for its business. It can buy each van for $35,000, depreciate it completely over 7 years, and then sell it for $10,000. The tax rate of Turnberry is 35%, and its cost of debt is 12%. Prince’s Rental Company will lease these vans to Turnberry for a period of 7 years at the annual rate of $5200, paid in advance. Turnberry will get the tax benefits of the lease at the end of each year. Should Turnberry buy or lease these vans?

ANSWER: NPV(Buy) = $21,983.98, NPV(Lease) = $19,844.77, lease ; PLEASE SHOW SOLUTIONS

Explanation / Answer

Buying

Leasing

a Initial Cash Inflow / Investment -14000000 b Depreciation -2000000 -2000000 -2000000 -2000000 -2000000 -2000000 -2000000 c Cash Flow on account of Tax saving @35% 700000 700000 700000 700000 700000 700000 700000 e Salvage Value ( After Tax ) 2600000 k Final /Total Net Cash Flow -14000000 700000 700000 700000 700000 700000 700000 3300000 L Present Value factor @ 12% 1 1 1 1 1 1 1 0 P Net Present Value -14000000 625000 558036 498246 444863 397199 354642 1492752 -9629262

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