Your friend Harold is trying to decide whether to buy or lease his next vehicle.
ID: 2584975 • 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 alternatives. Purchasing a new vehicle will cost $30,500, and Harold expects to spend about $900 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $12,100. Alternatively, Harold could lease the same vehicle for five years at a cost of $3,965 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, $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your final answers to 2 decimal places. Do not round intermediate calculations.) NPV Purchase Option Lease Option 2. Advise Harold about which option he should choose Lease Option O Purchase OptionExplanation / Answer
lease option
cash outflow-lease payments per year=3965$
cummulative present value@12%for 5 years=3.60
Total present value of cash outflow for 5 years=3965$*3.6=14274$
Purchase option
cash outflow in year0= 30500$
maintainence cost per year=900$
cummulative present value@12%for 5 years=3.60
present value of cash outflow for 5 years for maintainence=900$*3.6=3240$
cash inflow salvage value at end of year 5=12100$
present value of salvage value at end of year 5=12100$*0.57=6897$
Total present value of cash outflow for 5 years=30500$+3240$-6897$=26843$
by comparing cash outflow in option 1 is less
i.e 14274$<26843$ hence lease option is better option.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.