Question

Suppose that Mr. Agirich of Agirich Farms considers leasing a tractor instead of purchasing it. The leased tractor is the same as the tractor that would be purchased and must be operated and maintained the same. Mr. Agirich requires at least a 15% pre-tax return on capital on this type of investments. Assume that Mr. Agirich expects inflation to be 2% and his marginal tax rate to be 30%. Mr. Agririch can buy the tractor for $60,000 and sell it for $40,000 in three years(nominal dollars; do not need to adjust for inflation) . The tractor can be depreciated for tax purposes over seven years.

Calculate the Present Value of Tax Savings from Depreciation.

a. 6,339                      b. 11,513

            c. 1,929                       d. None of the answers are correct.

F.         Calculate the After-Tax Terminal Value

a. 38,286                    b. 40,000

            c. 25,714                     d. None of the answers are correct.

G          Calculate the NPV of owning the tractor.

a. -6,339                     b. -28376

             c. -25,285                  d. None of the answers are correct.

H.         Calculate the real annuity equivalent for the purchased tractor.

a. -11,074                    b. -9,870

            c. -10,257                   d. None of the answers are correct.

I. If the real annuity equivalent for the lease was calculated as -7,399, would you purchase the tractor or lease the tractor?

a. Lease the Tractor                        b. Purchase the Tractor

Answer 1