Problem 3.

Please note this is from the point of view of the lessee, the renter, not the owner.

Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class.If the firm borrows and buys the truck, the loan rate would be 10%. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000.If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year.The lease terms call for a $10,000 lease payment (4 payments total) at the beginning of each year.DTC's tax rate is 40%.Should the firm lease or buy?(Note:MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)