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Brown - (Excel net advantage to leasing Brown Storage...

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(Excel: net advantage to leasing) Brown Storage Technology is planning to buy a propane-fueled truck for $100,000. Brown expects to use the truck for eight years, after which it has an expected salvage value of $8,000. Brown’s before-tax cost of borrowing is estimated to be 8.0% and its marginal tax rate is 40%. McLeavy Leasing will lease this same truck to Brown for eight beginning-of-year lease payments of $16,000. The tax savings from depreciation occur at the end of the year, and the tax savings from the lease payments occur at the time they are paid. a. Assuming that the truck is depreciated straight-line to a zero salvage value over eight years, what is Brown’s net advantage to leasing? b. Assuming that the truck is depreciated as five-year property under MACRS, what is the net advantage to leasing? (Refer to Table 10.7 for the MACRS depreciation schedule.) Why does your answer differ from part a? c. Still using the five-year MACRS depreciation schedule, what is the maximum lease payment that McLeavy could charge Brown? That is, what lease payment would result in the zero net advantage to leasing? a. Year 0 1 2 3 4 5 6 7 8 Outlay $100,000 $0 $0 $0 $0 $0 $0 $0 $0 Payment -$16,000 -$16,000 -$16,000 -$16,000 -$16,000 -$16,000 -$16,000 -$16,000 $0 Tax Credit $6,400 $6,400 $6,400 $6,400 $6,400 $6,400 $6,400 $6,400 $0 Dep Tax Credit $0 -$5,000 -$5,000 -$5,000 -$5,000 -$5,000 -$5,000 -$5,000 -$5,000 Salvage $0 $0 $0 $0 $0 $0 $0 $0 -$4,800
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