Your landscaping company can lease a truck for $8,700 a year (paid at year-end)
ID: 2800833 • Letter: Y
Question
Your landscaping company can lease a truck for $8,700 a year (paid at year-end) for 7 years. It can instead buy the truck for $46,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%.
What is the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
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.)
Your landscaping company can lease a truck for $8,700 a year (paid at year-end) for 7 years. It can instead buy the truck for $46,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%.
Explanation / Answer
Answer a.
Annual Lease Payment = $8,700
Period of lease = 7 years
Annual Interest Rate = 8%
Cost of Leasing = $8,700 * PVA of $1 (8%, 7)
Cost of Leasing = $8,700 * (1 - (1/1.08)^7) / 0.08
Cost of Leasing = $8,700 * 5.2064
Cost of Leasing = $45,295.68
So, Present value of lease is $45,295.68
Answer b.
Lease is cheaper than purchase of truck.
Answer c-1.
Annual Lease Payment = $8,700
Period of lease = 7 years
Annual Interest Rate = 8%
Cost of Leasing = $8,700 * PVAD of $1 (8%, 7)
Cost of Leasing = $8,700 * 1.08 * (1 - (1/1.08)^7) / 0.08
Cost of Leasing = $8,700 * 5.6229
Cost of Leasing = $48,919.23
So, Present value of lease is $48,919.23
Answer c-2.
Purchase is cheaper than lease of truck.
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