Your landscaping company can lease a truck for $9,000 a year (paid at year-end)
ID: 2812266 • Letter: Y
Question
Your landscaping company can lease a truck for $9,000 a year (paid at year-end) for 7 years. It can instead buy the truck for $48,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%.
a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Present value of lease is $46,857.33
c. What is the present value of the cost of leasing 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 is _________________
Explanation / Answer
Solution -
Present value = lease payment (PVAF,rate,period)
a) lease amount (paid at year end)=$9000
No of years = 7 years
Rate of interest = 8%
Present value of lease = $9000*(PVAF,8%,7years)
Present value of lease = $9000*5.2064=$46,857.60
Decision - leasing option is better as buy option more costly
c) Calculation of Present value of lease if annuity due ( payment made at the beginning of period)
Present value = lease payment * (PVAF, 8%,0-6 years)
Present value of lease = $9000 * 5.6229=$50,606.10
Decision- Buying option more better as lease option more costly.
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