Your landscaping company can lease a truck for $7,400 a year (paid at year-end)

Question

Your landscaping company can lease a truck for $7,400 a year (paid at year-end) for 7 years. It can instead buy the truck for $40,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%. a. What is the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value of lease $ 4144 b. Is it cheaper to buy or lease? Buy Lease c-1. What if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value of lease $ 4485 c-2. Is it cheaper to buy or lease? Buy Lease

Explanation / Answer

where, Pmt. = Year-end annuity= 7400 i= reqd.rate of interest= 8% n= no.of years = 7 Substituting the values, we get PV = 7400*((1-(1+0.08)^-7)/0.08) 38527 Buying cost of the truck = 40000 So, it is cheaper to lease as 38527

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