The Jacob 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, which will be financed by the bank at an interest rate of 12%. The loan must be repaid in four equal installments, payable at the end of each year. Under the borrow-to-purchase arrangement, Jacob would have to maintain the truck at an annual cost of $1,200, also payable at year-end. Alternatively, Jacob could lease the truck under a four-year contract for a lease payment of $ 12,000 per year. Each annual lease payment must be made at the beginning of each year. The truck would be maintained by the lessor. The truck falls into the five-year MACRS classification, and it has a salvage value of $10,000, which is the expected market value after four years, at which time Jacob plans to replace the truck, irrespective of whether it leases or buys. Jacob has a marginal tax J rate of 40% and a MARR of 15%.
(a) What is Jacob's cost of leasing in present worth?
(b) What is Jacob's cost of owning in present worth?
(c) Should the truck be leased or purchased?
This is an operating lease, so the truck would I be maintained by the lessor.