Evaluating potential lease for sophisticated ambulance

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Reference no: EM131875224

Dakota Healthcare Corporation (DHC) is evaluating a potential lease for a sophisticated ambulance with a 4-year life that costs $90,000 and falls into the MACRS 3-year class. If the firm borrows and buys the ambulance, the loan rate would be 6%, and the loan would be amortized over the ambulance’s 4-year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The ambulance will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $12,000. If DHC buys the ambulance, it would purchase a maintenance contract that costs $3,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $25,000 lease payment (4 payments total) at the beginning of each year. DHC's tax rate is 35%. Should the firm lease or buy? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)

Leased, NAL=$6,490

Buy, NAL= -$7,478

$Lease, NAL= $1,560

Buy, NAL= $3,432

None of the above

Reference no: EM131875224

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