Your landscaping company can lease a truck for $7,300 a year (paid at year-end)
ID: 2800941 • Letter: Y
Question
Your landscaping company can lease a truck for $7,300 a year (paid at year-end) for 5 years. It can instead buy the truck for $32,000. The truck will be valueless after 5 years. The interest rate your company can earn on its funds is 6%. a. What is the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value of lease $ b. Is it cheaper to buy or lease? Buy Lease c-1. What if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value of lease $ c-2. Is it cheaper to buy or lease? Buy Lease
Explanation / Answer
Lease Purchase Purchase price 32000 Lease rentals 7300 Cost of equity 6.00% (i) Cost of leasing - Year Lease payments PV factors PV 1 7300 0.943396 6886.792 2 7300 0.900158 6571.154 3 7300 0.85404 6234.491 4 7300 0.810285 5915.077 5 7300 0.768771 5612.028 31219.54 (ii) Cost of buying = 32000 (iii) Leasing is cheaper then buying (iv) PV of annuity of lease payments - =A/i 121666.7 In this case Buying is a better option Please provide feedback…. Thanks in advance…. :-)
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