You own a construction company and need to set up a generator set for one of you

Question

You own a construction company and need to set up a generator set for one of your projects in a remote area, which you expect to last five years. You have two options. You can choose to buy one, or to lease one. If you decide to buy it, it has a first cost of 500,000AED, fuel costs of 20,000AED and maintenance costs of 10,000 per year, and a salvage value of 100,000AED. It will also require a major overhaul after the third year costing an additional 50,000AED. On the other hand, if you decide to lease it, the rent would be 90,000AED per year, the fuel costs would be the same, and all maintenance is covered by the lease contract. However, you would be required to pay 60,000AED installation cost in order to install it and 30,000AED removal cost at the end of the 5-year period. At i-996 per year perform a lease/buy analysis and recommend the better option. ..] PW equation for leasing: PW equation for Buying PW value for lease PW value for Buying [ A.-90000 (PIA, 9%, 5)-60000 + 30000 (PIF, 9%, 5) B. Lease C. Less than -575,000 AED D-520000-10000 (PA, 9%, 5) + 100000 Chosen Option (PF, 9%, 5)-50000 (PIA, 9%, 3)

Explanation / Answer

PW equation for leasing: A: -90,000(P/A, 9%,5) - 60,000 + 30,000(P/F, 9%, 5)

PW equation for buying: D: -520,000 - 10,000 (P/A, 9%, 5) + 100,000 (P/F, 9%, 5) - 50,000 (P/A, 9%, 3)

PW value for lease = (- 90,000 x 3.8897) - 60,000 + (30,000 x 0.6499) = 429,570 AED

PW value for buying = -520,000 - (10,000 x 3.8897) + (100,000 x 0.6499) - (50,000 x 0.7722) = 532,517 AED

Chosen Option : Lease (it is cheaper than buying by 102,947 AED).

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