Riverbend Telephone Company :: Case Study, solution

Riverb check Telephone CompanyThe Riverbend Telephone Company is experiencing growth and had previously try outsourcing some of its installation work to handle the overflow above its capacity. This was unsatisfactory, and so to accommodate the new customers, RTC needs to obtain a new victuals 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 bribe through debt, the cash costs for buying the truck for years 0- 4 argonThe cash costs for leasing the truck argonThe cash flows discounted by the risk-free rate of 9% allows us to compare the present values. This coincidence illustrates a net advantage to buying the truck in that location are not many advantages to leasing the vehicle, since Reliable does not cover the cost of victuals or registration and evaluatees. They only cover the cost of tires, a nominal expense, which does not offset the cost advantages of buying the vehicle. The caller does not appear concerned with their debt ratios or the threat of default. The main advantage to buying the vehicle, apart 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 affiance 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 extra expense and cash outflow but purchasing cool off body a more 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 new(prenominal) 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 wo uld 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.Case 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 habitual service commission?