35.00 points Your friend Harold is trying to decide whether to buy or lease his

Question

35.00 points 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 $35,000, and Harold expects to spend about $1,350 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $13,900. Alternatively, Harold could lease the same vehicle for five years at a cost of $4,550 per year, including maintenance. Assume a discount rate of 12 percent. Required 1. Calculate the net present value of Harold's options. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, 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

Explanation / Answer

present value of lease option

annual lease payment*PVAF AT 10% FOR FIVE YEARS

-4550*3.6047

-16401.4

YEAR

PVF AT 12% = 1/(1+R)^N R = 12%

NPV OF LEASE OPTION

-16401.4

1

0.892857

2

0.797194

NPV OF PURCHASE OPTION

PURCHASE PRICE+PRESENT VALUE OF ANNUAL MAINTENANCE EXPENSE-PRESENT VALUE OF SCRAP VALUE

3

0.71178

PURCHASE PRICE

-35000

4

0.635518

PRESENT VALUE OF ANNUAL MAINTENANCE EXPENSE

-4866.35

-4866.35

5

0.567427

PRESENT VALUE OF SCRAP VALUE

13900/(1.12)^5

7887.233

PVAF AT 12% FOR 5YEARS'

3.604776

NPV OF PURCHASE OPTION

-31979.1

-31979.1

NPV OF LEASE OPTION

-16401.4

NPV OF PURCHASE OPTION

-31979.1

LEASE OPTION IS THE BETTER ONE

present value of lease option

annual lease payment*PVAF AT 10% FOR FIVE YEARS

-4550*3.6047

-16401.4

YEAR

PVF AT 12% = 1/(1+R)^N R = 12%

NPV OF LEASE OPTION

-16401.4

1

0.892857

2

0.797194

NPV OF PURCHASE OPTION

PURCHASE PRICE+PRESENT VALUE OF ANNUAL MAINTENANCE EXPENSE-PRESENT VALUE OF SCRAP VALUE

3

0.71178

PURCHASE PRICE

-35000

4

0.635518

PRESENT VALUE OF ANNUAL MAINTENANCE EXPENSE

-4866.35

-4866.35

5

0.567427

PRESENT VALUE OF SCRAP VALUE

13900/(1.12)^5

7887.233

PVAF AT 12% FOR 5YEARS'

3.604776

NPV OF PURCHASE OPTION

-31979.1

-31979.1

NPV OF LEASE OPTION

-16401.4

NPV OF PURCHASE OPTION

-31979.1

LEASE OPTION IS THE BETTER ONE

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