<p>a consulting engineering firm is trying to decide between purchasing and leas

Question

<p>a consulting engineering firm is trying to decide between purchasing and leasing cars.It estimates that medium-sized cars will cost 8300 dolars and will have a probable trade-in value in 4 years of 2800 dolars.The annual cost of such items as fuels and repairs is expected to be 950 dolars the first year and to increase by 50 dolars per year.Alternatively, the company can lease the same cars for 3500 dolars per year payable at beginning of each year.Since some maintance is included in the rental price, the annual maintance and the operation expenses are expected to be 100 dolars lower if the cars are leased.If the company's minimum rate of return is 20% per year,which alternative should be selected?</p>

Explanation / Answer

Year Purchase Lease Discount Factor Purchase Lease 0 8,300 3,500 8,300 3,500 1 950 4,350 0.83333 792 3,625 2 1,000 4,400 0.69444 694 3,056 3 1,050 4,450 0.5787 608 2,575 4 (1,700) 1,000 0.48225 (820) 482 Lease discounted cash flow = 13,238 Purchase discounted cash flow = 9,574 Purchase is better deal.

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