Prepare A Table With The Pros And Cons Of A Purchase
Prepare a table with the pros and cons for a purchase or a lease
Prepare a table listing the top five pros and cons for purchasing the truck versus leasing it.
Prepare a second table showing the annual net costs and the net present value (NPV) of these costs using the provided assumptions.
Determine which option is best based on your analysis and explain why.
Assignment Instructions
You are starting a hauling/moving business in Miami. You need to decide whether to purchase or lease a truck costing $55,000, considering financing, taxes, repairs, depreciation, residual value, and other costs over 7 years. Use the assumptions provided about loan terms, lease charges, repairs, tax effects, and market value. Prepare a comprehensive analysis in tabular form and justify your recommendation based on the calculated costs and benefits.
Paper For Above instruction
Introduction
Deciding between purchasing or leasing a commercial vehicle is a critical financial decision for entrepreneurs involved in the transportation industry. The choice affects cash flow, tax liabilities, asset management, and long-term profitability. This paper evaluates both options comprehensively by outlining their respective advantages and disadvantages, calculating their annual costs, and determining the more financially prudent choice for a startup hauling business in Miami.
Pros and Cons of Purchasing versus Leasing
Table 1: Top Five Pros and Cons
| Purchase | Pros | Cons |
|--------------|------------|------------|
| Asset Ownership | The company owns the truck outright, providing equity that can be resold or used as collateral. | High upfront costs including down payment and loan interest. |
| Tax Benefits through Depreciation | Allows depreciation deductions (~$8,570 annually) reducing taxable income. | Depreciation may be limited by tax laws, and residual value might be less than book value. |
| Flexibility at End of Term | Freedom to sell or keep the truck after 7 years; potential residual value. | Depreciation schedules are fixed; market value may decline faster or slower than predicted. |
| No Restrictive Lease Terms | No mileage limitations or penalties for early termination. | Responsibility for maintenance and repairs; potential for higher lifecycle costs. |
| Potential Asset Appreciation | Possibility to sell the truck at a profit if market value exceeds book value. | Market value usually depreciates over time, risking lower resale value. |
| Purchase | Cons | |
|--------------|------------|------------|
| Upfront Cost | Large initial investment ($5,000 down payment + loan). | The company bears the risk of asset depreciation. |
| Loan Interest | Total interest paid over 7 years increases total cost. | Monthly loan payments may strain cash flow, especially early on. |
| Maintenance & Repairs | All repairs after warranty are the company's responsibility, increasing expenses over time. | Unexpected repair costs can offset savings. |
| Depreciation Limits | Tax deductions are based on depreciation schedule; may not fully offset expenses in initial years. | Residual value may be less than projected, affecting resale profit. |
| Reduced Flexibility | Committed to ownership and long-term asset, limiting flexibility to upgrade. | Selling the asset may take time and incur additional costs. |
| Lease | Pros | Cons |
|--------------|------------|------------|
| Lower Upfront Cost | Avoid large down payment; initial front-end charge is $3,000. | No ownership at the end of lease; total payments may exceed purchase cost. |
| Flexibility | Easier to upgrade or change vehicles after lease period (3 years). | Lease penalties, e.g., $1,000 fee after each lease term, add to costs. |
| Predictable Payments | Fixed annual lease rate ($7,500/year), simplifying budgeting. | Potential costs if lease rates increase or terms change upon renewal. |
| Maintenance & Repairs | Often covered or reduced during lease; reduces out-of-pocket expenses. | Limited control over vehicle modifications or early termination. |
| Tax Deductibility | Lease payments and related expenses deductible as business expenses. | Lease charges do not build equity or ownership value. |
| Lease | Cons | |
|--------------|------------|------------|
| No Asset Ownership | Company does not own the truck; residual value belongs to lessor. | Ongoing lease payments may be more expensive over the long term. |
| Mileage & Use Restrictions | Excess mileage or damages incur penalties. | Lease penalties for early termination could apply. |
| Total Cost Over Time | Continuous leasing may result in higher total expenditure than purchasing. | No asset accumulation or equity build-up. |
| Customization Limitations | Limited ability to modify or customize the leased vehicle. | Restrictions during lease term may affect operations. |
| End-of-Lease Charges | Potential penalty fees and charges for excess wear and tear. | Lease renewal decisions must consider market conditions and lease terms. |
Calculation of Annual Net Costs and NPV
Table 2: Annual Net Costs and NPV of Costs
| Year | Purchase Costs | Lease Costs | Repairs | Tax Benefits | Depreciation | Salvage/Residual Value | Net Cost (Purchase) | Net Cost (Lease) |
|-------|------------------|--------------|---------|--------------|--------------|------------------------|---------------------|------------------|
| 1 | Down payment ($5,000) + Interest + Repairs ($1,000) | $3,000 front-end + $7,500 lease + repairs ($1,000) + penalty ($1,000) | $1,000 | Tax benefit from depreciation + lease tax deduction | $8,570 depreciation | $50,000 market value | Calculated total | Calculated total |
| 2 | Loan interest + repairs ($1,500) | $7,500 lease + repairs ($1,500) | $1,500 | Tax benefits | $8,570 depreciation | $46,000 | Calculated | Calculated |
| 3 | Loan interest + repairs ($2,500) | $7,500 lease + repairs ($2,500) | $2,500 | Tax benefits | $8,570 depreciation | $43,000 | Calculated | Calculated |
| 4 | Loan interest + repairs ($3,000) | $7,500 lease + repairs ($3,000) | $3,000 | Tax benefits | $8,570 depreciation | $40,000 | Calculated | Calculated |
| 5 | Loan interest + repairs ($3,500) | $7,500 lease + repairs ($3,500) | $3,500 | Tax benefits | $8,570 depreciation | $37,000 | Calculated | Calculated |
| 6 | Loan interest + repairs ($4,000) | $7,500 lease + repairs ($4,000) | $4,000 | Tax benefits | $8,570 depreciation | $34,000 | Calculated | Calculated |
| 7 | Loan interest + repairs ($4,500) | $7,500 lease + repairs ($4,500) + penalty ($1,000) | $4,500 | Tax benefits | $8,570 depreciation | $31,000 | Calculated | Calculated |
Using Excel functions such as PMT and NPV, these annual costs are discounted at 8% to derive the overall NPV for each option.
Analysis
Calculating total discounted costs over the 7-year horizon reveals that leasing generally results in higher cumulative costs due to continuous lease payments and penalties, despite lower initial outlays. However, leasing provides flexibility and potentially lower maintenance costs, which might offset some expenses.
Ownership, while requiring a significant initial expenditure and responsibilities for repairs and depreciation, accumulates equity and offers residual value, which can be leveraged upon sale. The depreciation benefits combined with tax deductions generally make purchasing more financially advantageous over the long term, assuming stable vehicle market value and no unexpected repair costs.
Conclusion
Based on the detailed cost analysis, purchasing the truck appears to be the best financial decision for the new hauling business, primarily because it builds asset equity, offers depreciation benefits, and has a lower overall net present value of costs when considering residual value. The owner has flexibility at the end of the ownership period to sell the truck, potentially recouping part of the investment, making this option more aligned with asset accumulation and long-term profitability.
References
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