Your friend Harold is trying to decide whether to buy or lease his next vehicle.

Question

Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option 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. Alternatively, 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 Harold's options. (Future Value of $1, Present Value of $1, Future Value Annuity 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

Explanation / Answer

Computation of Net present Value-Purchase Option Cash Outflow Amount Time PVF @10% Present Value Purchase Cost $31,000 0 1 $31,000 Maintainance Cost for 5 year $950 1-5 3.791 $3,601 Less: Salvage Value at end of 5 Year -$12,300 5 0.621 -$7,638 Net Present Value of Purchase Option $26,963 Computation of Net present Value-Lease Option Cash Outflow Amount Time PVF @10% Present Value Annual Lease cost $4,030 1-5 3.791 $15,278 Net Present Value of Purchase Option $15,278

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