Deciding to Lease or Buy [LO 11-3, 11-5] Your friend Harold is trying to decide
ID: 2473173 • Letter: D
Question
Deciding to Lease or Buy [LO 11-3, 11-5] Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $33,500. and Harold expects to spend about $1,200 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $13,300. Alternatively. Harold could lease the same vehicle for five years at a cost of $4,355 per year, including maintenance. Assume a discount rate of 10 percent. Requirement: Calculate the net present value of Harold s options. (Future Value of $1. Present Value of $1. Future Value Annuity of $1. Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your final answers to 2 decimal places.) Advise Harold about which option he should choose. Lease Option Purchase OptionExplanation / Answer
NPV in lease option is lower than purchase, hence suggest lease option
Purchase Lease Year Cash flow PV Factor NPV Cash flow PV Factor NPV 0 (33,500) 1.000 (33,500) -4355 1.000 (4,355) 1 (1,200) 0.909 (1,091) -4355 0.909 (3,959) 2 (1,200) 0.826 (991) -4355 0.826 (3,597) 3 (1,200) 0.751 (901) -4355 0.751 (3,271) 4 (1,200) 0.683 (820) -4355 0.683 (2,974) 5 (1,200) 0.621 (745) 0.621 - 5 13,300 0.621 8,259 0.621 - Net Present value (29,789) (18,156)Related Questions
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