Paolo, the CEO of Paola Bros Inc., wants to have a Ferrari as a company car. The Ferrari costs $1.5 million. For tax purposes, assume that the car will depreciate at a rate of $180,000 per year. In five years, the Ferrari could be sold for $800,000. The Ferrari could be leased on a five-year operating lease for $200,000 per year. The lease payment would be made at the beginning of the year. If the effective tax rate of Paolo Bros Inc. is 35 percent, and its before-tax cost of borrowing is 8 percent, should Paolo lease the Ferrari or buy it?
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