Riverbend Telephone Company :: Case Study, solution

Riverbend Telephone CompanyThe Riverbend Telephone Company is experiencing growth and had previously tried outsourcing rough of its installation work to handle the overflow above its capacity. This was unsatisfactory, and so to accommodate the new customers, RTC inescapably to obtain a new maintenance truck and crew. It is considering whether leasing or buying the new truck necessary to their operations is the preferable method of investment. Question 1& 2Without considering financing the purchase through debt, the cash cost for buying the truck for years 0- 4 areThe cash costs for leasing the truck areThe cash flows discounted by the risk-free rate of 9% allows us to compare the present values. This comparison illustrates a net advantage to buying the truck thither are not many advantages to leasing the vehicle, since Reliable does not account the cost of maintenance or registration and taxes. They only cover the cost of tires, a minimal expense, which does not offset the cost ad vantages of buying the vehicle. The company does not seem concerned with their debt ratios or the threat of default. The main advantage to buying the vehicle, aside from the better price is the depreciation tax shield, which subtracts annual $1800 from the costs of ownership. There are tax advantages to leasing, as the lock payments are a tax deductible expense, but that tax savings amounts to $2,880/ year.However, this calculation is incomplete because the company needs to take on debt to finance the purchase of the car. These payments add an additional expense and cash outflow but purchasing still remains a more than attractive option. The cost of the lease is still greater than the cost of debt. The NAL still favors buying over leasing by $1216. The only other consideration would be that lease may raise the earnings on asset ratio above 12%. But since the PV of the lease payments is greater than 90% of the FMV (assuming the purchase prices is FMV), then it would be considered a capital lease and the asset would go on the Balance Sheet. Therefore there are no earning over asset ratio advantages to leasing. eluding Question 2Using MACRS, the tax benefit realized in the early years, still does not significantly affect the NAL. Overall the tax benefits at the end of the five years are still equal. Case Question 3If the truck is leased, how should Mr. Freeman report investment and annual income for the RTC to the state domain service commission?