Question

Jim owns a lawn care service. He would like to obtain a new heavy duty trailer to haul his equipment and materials from job to job. He’s found one that will suit his needs. The purchase price is $8,500. Jim is in a 28% tax bracket and sales taxes are 5%. The cost of capital for Jim to purchase the trailer is 8%. The trailer qualifies for 5 year MACRS depreciation method. Jim intends on using the equipment for 60 months. The salvage value of the trailer at the end of the use period is $4500. Jim has also found a dealer that is willing to lease the trailer to him for 60 months for $150 per month. The lease payments would be due at the beginning of the month.

What is the total depreciation benefit [PW(8%)]?

$7897.00 or $1893.00

What is the taxable gains or (loss) tax on the sale of the equipment?

$972.00 or $1260.00

What is the total cost of the buy decision?

$4685.00 or $4512.00

Should Jim lease or buy this trailer?

Lease or Buy

Answer 1