Your friend Harold is trying to decide whether to buy or lease his next vehicle.
ID: 2578314 • Letter: Y
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 aternatives Purchasing a new vehicle wil cost $33,000, and Harold expects to spend about $1,150 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $13,100. Alternatively, Harold could kease the same vehicle for five years at a cost of $4,290 per year, including maintenance. Assume a discount rate of 11 percent Required: 1. Caleulate the net present valtue of Harold's options (Ehure Value ot s1. eresent Value ot $1, Euture Value Annuty ot $1, Pxesent Vabue Annulth ot $1)(use appropriste factorts) trom 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) Purchase Option Lease Option 2. Advise Harold about which option he should choose e Lease Option O Purchase Option HintsReterences eBook & ResourcesExplanation / Answer
Answer 1. Calculation of NPV of Project Particulars Year 12% Factor Purchase Lease Amount Present value Amount Present value D C C X D E D X E Cash Inflow Salvage Value of Vehicle 5 0.59345 13,100 7,774 A. Total Cash Inflow - PV 7,774 - Cash Outflow Cost of New Vehicle 0 1.00000 33,000 33,000 Maintenance Expenses 1-5 3.69590 1,150 4,250 Lease Expenses 1-5 3.69590 4,290 15,855 B. Total Cash Outflow - PV 37,250 15,855 NPV (A - B) (29,476) (15,855) Answer 2. Lease Option.
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