Your firm needs to invest in a new delivery truck. The life expectancy of the de

Question

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6% APR with quarterly compounding.

The effective annual rate on your firm's borrowings is closest to:

A) 6.00%

B) 6.24%

C) 6.17%

D) 6.14%

The monthly discount rate that you should use to evaluate the truck lease is closest to:

A) 0.487%

B) 0.512%

C) 0.498%

D) 0.500%

Explanation / Answer

Solution:

The effective annual rate on firm's borrowing is -

EAR = ( 1 + APR/ k ) k - 1

= ( 1 + 0.06 / 4 ) 4 - 1

= 6.136 % or 6.14 %

Monthly Discount Rate -

=( 1+ EAR ) ( 1 / 12 ) - 1

= ( 1 + 0.6136) * 0.083 - 1

= 0.498 %

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