1.Debra and Ray Spartan need a new truck for their ranch. The truck is valued at $22,500. The truck purchase requires a 30% downpayment. The 9%, six-year loan has equally annual amortized payments. The first loan payment is due at the end of year 1. The market value of the truck in the 7th year is $2,250. Depreciation is based on the seven-year class of the MACRS with a shift from 150% declining balance to straight line in the 4th year (table 3-16).

The truck can also be leased. The terms of the capital lease include a seven-year contract with annual rental payments of $3,937.5 due at the beginning of each year.

Debra and Ray's after tax discount rate is 10%. They are in the 35% tax bracket. What is the net present value of each option? Should they purchase or lease the truck? What other risk factors should Ray and Debra consider when making this decision?

Answer rating: 100% (QA)

To determine whether Debra and Ray should purchase or lease the truck we need to calculate the net p... View the full answer