Tax benefits of lease

Question

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?

Answer 1

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

Similarly for buy option,

FedEx should lease these vans since they are only cheaper.