3.5 An automobile costing $10,000 is to be used for business purposes. The auto
ID: 2452090 • Letter: 3
Question
3.5 An automobile costing $10,000 is to be used for business purposes. The auto has a service life of 3years with no salvage value. Two alternatives are under consideration :
a) Purchase the automobile by obtaining a blank loan(i=0.13), to be repaid in 36 monthly installments.
b) Lease the automobile (in this case all costs are deductible)
You are paying income taxes at a rate or 40 percent. What is the highedst monthly lease cost equicalent to purchase of the auto, if you use ACRS depreciation in case a). Use net present value(i=0.12)
Explanation / Answer
Ans- Calculation of PV of purchase of the auto
Total Cash out flow of purchase=$11481
Yearly Lease equipvalent cost =11481/2.402
=$4720
Monthly Lease equipvalent cost=4720/12
=$398.33
Note-
Installment payment
total interest=10000*3*13/100
=$3900
Total repayment (3900+10000)$13900
Per year installment =13900/3=$4633
Installment Depreciation Total cost Tax saved @40% After tax DF @12% PV OF CASH FLOW 4633 3333 7966 3186 4780 0.893 4268 4633 3333 7966 3186 4780 0.797 3809 4634 3334 7968 3187 4781 0.712 3404 2.402 11481