The Jacobs company needs to acquire a new lift truck for transporting its final product to the warehouse.
One alternative is to purchase the truck for $45,000. Maintenance of the truck will be an annual cost of $1,200. The truck falls into the 5-year MACRS classification and it has a salvage value of $10,000, which is the expected market value after 4 years, at which time Jacob plans to replace the truck, irrespective of whether it is purchased or leased.
Alternatively, Jacob could lease the truck under a four-year contract for a lease payment of $15,000 per year. Each annual lease payment must be made at the beginning of the year. This is an operating lease, so the truck would be maintained by the lessor (the leasing company).
The Jacobs company has a marginal tax rate of 40% and a MARR of 15%.
a, Prepare an Income for the "Buy" cost-only option.
b. Prepare Cash flow statement for the "Buy" option.
c. What is the present worth of the cost of purchasing the truck?