Problem:
(Net advantage to leasing) Empire Excavation Corporation plans to acquire a fleet of 10 dump trucks. Each truck costs $75,000. Empire can borrow $750,000 on a secured basis at a pretax cost of 14%. The dump trucks can be depreciated for tax purposes on a straightline basis to zero over a five-year useful life. Truck Leasing Corp. has offered to lease the fleet of trucks to Empire under a five-year lease that calls for lease payments of $190,000 at the end of each year. Empire estimates that forgone residual value would be $10,000 per truck (net of taxes). Empire's tax rate is 34%. Its cost of capital is 16%.
Q1. Calculate the stream of net cash flows to Empire under the lease financing.
Q2. Calculate the net advantage to leasing.