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Tax benefits of lease

FedEx would like to acquire 300 vans for its business. It can buy each van for $35,000, depreciate it completely over 5 years, and then sell it for $10,000. The tax rate of FedEx is 30%, and its cost of debt is 10%. Avis Fleet Rental will lease these vans to FedEx for a period of 5 years at the annual rate of $6,500, paid in advance. FedEx will get the tax benefits of the lease at the end of each year. Should FedEx buy or lease these vans?

E

Expert

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The after-tax cost of borrowing is 10% (1 – 0.3) = 7%.

632_tax lease1.jpg

Similarly for buy option,

542_tax lease2.jpg

FedEx should lease these vans since they are only cheaper.

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