The Hole-in-the-Wall Camp is trying to decide whether it should lease a new hand
ID: 2384124 • Letter: T
Question
The Hole-in-the-Wall Camp is trying to decide whether it should lease a new handicapped transport van or buy one. The lease would be for four years and call for the $7,700 annual payments including maintenance and insurance that are shown in the column labeled “Lease” below. As an accommodation to the camp, the leasing company has agreed to accept all payments, except the $2,500 cost of preparing the car for delivery, at the end of the each year of the lease. At the end of the lease, the van would be the property of the leasing company. If they buy the van, the Camp plans on using it for six years. They will pay $31,000 to buy the van, $2,250 each year for maintenance and insurance and will be able to sell the van for $10,000 at the end of the sixth year. The cash flows associated with owning the van and using if for six years are in the column labeled “Own” below.
The Camp was not able to negotiate a six-year lease for the van. If the cost of capital for the camp is 8%, which option should the camp take? Please show your work.
Period
Lease
Own
0
($2,500)
($31,000)
1
($7,700)
($2,250)
2
($7,700)
($2,250)
3
($7,700)
($2,250)
4
($7,700)
($2,250)
5
($2,250)
6
$7,750
Total
($33,300)
($34,500)
Period
Lease
Own
0
($2,500)
($31,000)
1
($7,700)
($2,250)
2
($7,700)
($2,250)
3
($7,700)
($2,250)
4
($7,700)
($2,250)
5
($2,250)
6
$7,750
Total
($33,300)
($34,500)
Explanation / Answer
Caculation of Net present value
Years Lease Discounting factor 8% Present value of cash inflows Own Present value of cash inflows
1 7700 0.9259 7129.43 2250 2083.27
2 7700 0.8573 6601.21 2250 1928.92
3 7700 0.7938 6112.26 2250 1786.05
4 7700 0.7350 5659.5 2250 1653.75
5 0.6806 2250 1531.35
6
Present value of cash inflows 25502.4 8983.34
Terminal value - 7750
25502.4 16733.34
Cash outlay (2500) (31000)
NPV 23002.4 (14266.66)
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