Riverbend Telephone Company

Topics: Depreciation, Investment, Net present value Pages: 2 (566 words) Published: May 4, 2005
Riverbend Telephone Company

The Riverbend Telephone Company is experiencing growth and had previously tried outsourcing some of its installation work to handle the overflow above its capacity. This was unsatisfactory, and so to accommodate the new customers, RTC needs to obtain a new maintenance truck and crew. It is considering whether leasing or buying the new truck necessary to their operations is the preferable method of investment.

Question 1& 2

Without considering financing the purchase through debt, the cash costs for buying the truck for years 0- 4 are:

The cash costs for leasing the truck are:

The cash flows discounted by the risk-free rate of 9% allows us to compare the present values. This comparison illustrates a net advantage to buying the truck:

There are not many advantages to leasing the vehicle, since Reliable does not cover the cost of maintenance or registration and taxes. They only cover the cost of tires, a minimal expense, which does not offset the cost advantages of buying the vehicle. The company does not seem concerned with their debt ratios or the threat of default. The main advantage to buying the vehicle, aside from the better price is the depreciation tax shield, which subtracts annual $1800 from the costs of ownership. There are tax advantages to leasing, as the lease payments are a tax deductible expense, but that tax savings amounts to $2,880/ year.

However, this calculation is incomplete because the company needs to take on debt to finance the purchase of the car. These payments add an additional expense and cash outflow but purchasing still remains a more attractive option. The cost of the lease is still greater than the cost of debt.

The NAL still favors buying over leasing by $1216. The only other consideration would be that lease may raise the earnings on asset ratio above 12%. But since the PV of the lease payments is greater than 90% of the FMV (assuming the purchase prices is FMV),...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Product Assesment Landline Telephone Essay
  • Cell Phone Company Analysis in the Competitive Market Essay
  • most admired companies Essay
  • The Evolution of the Telephone Essay
  • History of Telephone Essay
  • Invention of The Telephone Essay
  • American Telephone & Telegraph and At t Essay
  • The Telephone, the Device That Changed the Way We Communicate Essay

Become a StudyMode Member

Sign Up - It's Free