I am completly confused on how to set this problem up and how to decide of the t

Question

I am completly confused on how to set this problem up and how to decide of the two. Please help.
A state's department of transportation (DOT) is considering whether to buy or lease an RFID tracking system for asphalt, concrete, and gravel trucks to be used in road paving. Purchasing the RFID system will cost $5000 per truck, with a salvage value of $1500 after the RFID system's useful life of 5-years. However, the DOT considering this purchase is also looking at leasing the same RFID system for an annual payment of $3500, which includes a full replacement warranty. Assuming that the MARR is 11% and on the basis of an internal rate of return analysis, which alternative would you advise the DOT to consider?
Analyze incrementally using rate of return.

Explanation / Answer

I must agree with NiftyRabbit on the assertion that setting this problem up is a complete mess. I have poured over all chapters which concern incremental analysis for many hours now to no avail as to solving a problem that appears to give no positive cash flows save a salvage value, which does not even remotely come close to the costs of each alternative.

In my current brain storm I've considered this method: PW(i) = 0 = -1500 - 3500 (P/A, i, 5) + 1500 (P/F, i, 5) this equation being formed using the following chart and principles:

EOY Lease Buy ? Buy - Lease

0 -3500 -5000 -1500

1 -3500 0 3500

2 -3500 0 3500

3 -3500 0 3500

4 -3500 0 3500

5 -3500 1500 (3500 + 1500) = 5500

*NOTE: I seperated the 3500 and 1500 for the fact that the 3500 is a resulting factor from the P/A portion of the problem, whilst the 1500 is a factor using P/F of a salvage value.

Principles: [ higher cost] = [ lower cost] + [differences between each] using PW(i)=0 = PWbenefits - PWcosts

Current solution path:

-1500-3500(P/A,i,5) + 1500(P/F, i, 5) = 0 => 1500 + 3500(P/A, i, 5) = 1500(P/F, i, 5)

[costs] [benefit]

This method has always given me a sensible answer with respect to previous problems but this specific problem has a fundamental issue that I'm not seeing clearly... There either has to be some hidden annual returns which are implied using the warranty or perhaps the savings of choosing Buy compared to Lease gives Buy a proxy 'return' as there is essentially no annual cost associated with a single purchase which I am failing to include. I will try including these in my continuing work on this problem but if anyone could point out exactly what fallacies I am making, it would be appreciated.

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