You need a fork-lift truck to handle additional material handling operations at

Question

You need a fork-lift truck to handle additional material handling operations at your company. You can purchase this lift truck for $15,000. It is expected to last five years and will have a resale value of $1,000 at that time. Your other option is to lease this lift truck for five years with a down payment of $2,000 and a monthly lease payment of $300 paid at the end of each month. The operating and maintenance expenses are expected to be same whether you purchase the truck or lease it. If the minimum acceptable rate of return is 12% per year compounded monthly, should you purchase this lift truck or lease it?

Explanation / Answer

Lease is best option. costs incurred in purchase::: 15000*(1+12%/12)^(12*5) - resale Value =27250.45-1000=26250.45 ;;; Costs Incurred IN Lease : 2000*(1+12%/12)^(12*5)+Rent paid (300*60)=3633.39+18000=21633.39;;; from these calculations Lease option will save $4617.05

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