H&H Machine Systems Inc. needs to acquire a new lift truck for transporting final products to their warehouse. One alternative is to purchase the lift truck for $40,000, which will be financed by a bank loan 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, H&H would have to maintain the truck at an annual cost of $1,200, payable at year-end. Alternatively, H&H could lease the truck on a four‐year contract for a lease payment of $11,000 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 H&H plans to replace the truck, regardless of whether the company leases or buys. H&H has a marginal tax rate of 40% and an MARR of 15%.
(a) What is H&H’s cost of leasing in present worth?
(b) What is H&H’s cost of owning in present worth?
(c) Should the truck be leased or purchased?