Engineering Economic Analysis

Problems 397

12-56 Assume that you are debating whether to lease a car
or buy one to U$e exclusively in business. The es-
timated mileage in both cases will be 12,000/year.
Insurance costs will be the same in either case at $600
per year. You want to examine the tax impacts of the
two options to see which is preferred. Use MACRS
depreciation.
Assume that you will have leased or purchased
the car on June 30, 2003, and that your intend to keep
the car for 36 months. List any assumptions that you
make in your analysis. Use a 12% MARR, a 40% tax
rate, and assume end of year payments.
Lease option:$2250 down and $369 a month for
36 months.
Purchase option:The car that you are interested
in lists for $29,188 and the dealer finance plan
calls for 30 monthly payments of $973 with no
money down and 0% interest. Estimated value
after 36 months $15,200. Remember that the tax
law limits the depreciation on cars according to
the following rule:

Depreciation Limitation on Automobiles

Purchased During 2003

TaxYear Amount

First

Second

Third

Fourth and later

$7660

4900

2950

1775

12-57 A plant can be purchased for $1,000,000 or it can be

leased for $200,000 per year. The annual income is

expected to be $800,000 with the annual operating

cost of $200,000. The resale value of the plant is es-

timated to be $400,000 at the end of its lO-year life.

The company's combined federal and state income

tax rate is 40%. A straight-line depreciation can be

used over the 10 years with the full first-year depr~-

ciation rate.

(a)If the company uses ~e after-tax minimum at-

tractive rate of return of 10%, should it lease or

purchase the plant?

(b)What is the breakeven rate of return of purchase

versus lease?