Gormanghast Ltd is considering the acquisition of a small fleet of delivery vehicles to bring its goods to consumers. Each of the 6 trucks is expected to cost $45,000 up front, enjoy a 5 year lifespan, and then will be sold off for an estimated $10,000 each. These vehicles can be depreciated at 30% annually (CCA rate) but incur maintenance expenses of $3,000 per year each (paid at the end of each year). As a result of deliveries, the company will generate additional sales of $500,000 per year while (non-vehicle) expenses will expand by $300,000. The opportunity cost of having employees makes deliveries using the vehicles will be $30,000 per year. The firm’s marginal tax rate is 20%, its WACC is 9%, and the CCA pool containing the assets will remain open after the vans are salvaged.
Should Gormanghast acquire the vehicles? (5 marks)
Noting the firm’s interest in acquiring a fleet of vehicles, Vespan truck rentals offers to lease an equivalent fleet of vehicles to Gormanghast for monthly lease payments of $4,000 each and will cover all maintenance expenses. Payments will be made on the first day of each month and the lease would be considered “operational” for tax purposes (tax shields on these expenses would be gained at the end of each year).
Assuming a 4.7% after-tax cost of debt, should Gormanghast buy or lease the vehicles? (5 marks)