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:
Estimated residual value, 3 years
Annual interest rate
Annual, end-of-year (for simplicity) loan payments
Annual, end-of-year (for simplicity) lease payments
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