9-45 A car dealer leases a small computer with software for $5000 per year. As a

Question

9-45 A car dealer leases a small computer with software for $5000 per year. As an alternative be could buy the computer for $7000and lease the software for $3500 per year. Any time he would decide to switch to some other computer system he could cancel the software lease and sell the computer for $500.

a) If he buys the computer and leases the software what is the payback period?

b) If he kept the computer and software for 6 years, what would be the benefit-cost ratio based on an 8% interest rate?

Explanation / Answer

cost of total lease, T = 5000 * N, where N = no. of years

cost of software-only lease, S = (7000 - 500) + 3500 * N

Setting S=T and solving for N gives N = 6500/1500 = 4.3 years.

Since you can only lease 1 year at a time (I guess), then payback would be in 5 years.

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