Taxed based accounting problem.

Donald is in the real estate business. He wants to acquire a BMW 750i for use in his business for three years, and asks you for an analysis determining whether he should purchase or lease the BMW.

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Information regarding the car:

Purchase Option:

Cost

$97,000

Estimated residual value, 3 years

$55,000

Annual interest rate

4%

Down Payment

$0

Annual, end-of-year (for simplicity) loan payments

$34,954

Lease Option:

Down Payment

$0

Annual, end-of-year (for simplicity) lease payments

$18,000

REQUIRED: create Excel spreadsheet depicting discounted cash-flow analyses of the two options to determine if Donald would minimize the present value of his after-tax costs by purchasing or leasing the BMW. In making your calculations, assume the following:

· Donald is in the 32% marginal tax bracket for all years;

· Car is 100% business use;

· January 1 decision date;

· 6% discount rate to compute the present value of future cash flows;

· If Donald purchases the auto

· Use the 2018 depreciation limits for passenger autos in Rev Proc 2018-25;

· He will sell it at the end of 3 years for the estimated residual value quoted above;

· Hint: you’ll need to compute a loan amortization table for the interest deduction;

· Since we haven’t covered this yet, the sale of a business vehicle generates ordinary income/loss.

· If Donald leases the auto:

· Use the 2018 lease inclusion amounts for passenger autos in Rev Proc 2018-25;

· He will return the auto at the end of the lease