Riverbend Telephone Company

Topics: Price, Tax, Leasing Pages: 1 (336 words) Published: November 2, 2010
Riverbend Telephone Company has determined that they need a new maintenance truck and crew. Looking at the options they obtained 4 bids from truck dealers. They are expecting the truck to have a working life of five years. We looked at both options and believe that purchasing a new truck is the most cost effective when looking at keeping the truck for five years. The best offer for a lease is $7,200 a year with a total present value of $36,000. The best offer for purchasing a truck is $24,300. In both renting and purchasing a truck the cost of operation, taxes and all risk to the truck are the same, Riverbend Telephone Company is responsible for all of the costs. Maintenance costs are to be covered by the company in either situation; the only exception is that the leasing agent would replace the tires as needed which would save the company $760 a year for the second through fifth years. This creates a present value savings of $2,060.81. At the end of the five year lease Riverbend would turn the truck back over to the leasing agent and incur no additional fees at that time. When looking at purchasing the truck it is expected that the truck could be sold for $1,800 at the end of five years (present value being 1,021.37). The Tax Benefits of the leasing would have a present value of $10,382.40 for the five years with a tax rate of 40%. When looking at purchasing the truck, using straight-line depreciation for both tax purposes and reports to share holders over the five years the present value would be $6,489.00. Using the double-declining balance method of depreciation for income tax purposes would yield a present value savings of $5,385.58 for the five years. Both depreciations for purchasing the truck are based on having a sale price of $1,800 at the end of five years.
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