The Randolph Limited has decided to acquire a new truck. Onealternative is to lease the truck on a 4-year guideline contractfor a lease payment of R10,000 per year, with payments to be madeat the beginning of each year. The lease would include maintenance.Alternatively, Randolph Limited could purchase the truck outrightfor R40,000, financing the purchase by a bank loan for the netpurchase price and amortizing the loan over a 4-year period at aninterest rate of 10% per year. Under the borrow-to-purchasearrangement, RTC would have to maintain the truck at a cost ofR1,000 per year, payable at year end. The truck falls into theMACRS 3-year class. It has a residual value of R10,000, which isthe expected market value after 4 years, when Randolph Ltd plans toreplace the truck irrespective of whether it leases or buys.Randolph Limited has a marginal tax rate of 40%.
Required
1.1 What is Randolph’s Present Value cost of leasing?
1.2 What is Randolph’s Present Value cost of owning? Should thetruck be leased or purchased?
