E11-7 Deciding to Lease or Buy [LO 11-3, 11-5) Your friend Harold is trying to d

Question

E11-7 Deciding to Lease or Buy [LO 11-3, 11-5) Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each cption but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $31,000, and Harold expects to spend about $950 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $12,300. Altematively, Harold could lease the same vehicle for five years at a cost of $4,030 per year, including maintenance. Assume a discount rate of 10 percent Required: 1. Calculate the net present value of Harolds options. (Future Value of S1. Present Value of $1, Future Value Annity of S1. Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your final answers to 2 decimal places. Do not round intermediate calculations.) NPV Purchase Option Lease Option 2. Advise Harold about which option he should choose. Lease Option Purchase Option Hints References eBook &Resources; Hint#1 Check mywo

Explanation / Answer

Note: The factors used are upto 4 decimal places. If the factors given in the tables provided with the question are anything other than 4 decimal places, the final answers could be different. Kindly confirm prior to submission.

1.

Working:

Purchase Option:

Lease Option:

2. Lease Option.

Since NPV of the leasing option is higher than NPV of the purchase option.

NPV Purchase Option -26964.19 Lease Option -15276.92

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