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(TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class.

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(TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for 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. 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, its after-tax cash flows would be the following: (Year 1) -6,339; (Year 2) -4,764; (Year 3) -9,943; (Year 4) -5,640; all occurring at the end of respective years. The lease terms, call for a $10,000 lease payment (four payments total) at the beginning of each year. DTC’s tax rate is 40%. Should the firm lease or buy?

(a) $849

(b) $997

(c) $945

(d) $897

(e) $1,047

Please show Calculation steps?

 
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