A florist can purchase a delivery truck from her local GM dealer for $25,000. The GM dealer...

80.2K

Verified Solution

Question

Finance

A florist can purchase a delivery truck from her local GMdealer
for $25,000. The GM dealer will also lease the truck for$6,100
per year over five years. The truck has an expected life ofseven
years. The truck is expected to be worth $2,500 (after?tax) infive
years and the florist has the option to buy it at fair marketvalue
at that time.
If the florist wants to purchase the truck, she must borrowthe
money from Simple Loans Bank at a current rate of 10%. The
florist’s tax rate is 34%. For simplicity assumestraight?line
depreciation

(a) Find out the incremental cash flows for the leasingdecision with and without salvage value

(b) Which financing option is better (with and withoutsalvage
value)?

(c) What would be the break?even before?tax lease rentalwith
and without salvage value?

Answer & Explanation Solved by verified expert

3.9 Ratings (678 Votes)

See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

A florist can purchase a delivery truck from her local GMdealerfor $25,000. The GM dealer will also lease the truck for$6,100per year over five years. The truck has an expected life ofsevenyears. The truck is expected to be worth $2,500 (after?tax) infiveyears and the florist has the option to buy it at fair marketvalueat that time.If the florist wants to purchase the truck, she must borrowthemoney from Simple Loans Bank at a current rate of 10%. Theflorist’s tax rate is 34%. For simplicity assumestraight?linedepreciation(a) Find out the incremental cash flows for the leasingdecision with and without salvage value(b) Which financing option is better (with and withoutsalvagevalue)?(c) What would be the break?even before?tax lease rentalwithand without salvage value?