QUESTION 10 From: Principles of Finance with Excel 3rd ed, Benninga and Mofkadi,

Question

QUESTION 10 From: Principles of Finance with Excel 3rd ed, Benninga and Mofkadi, 0 2018, 2011, 2006 You are considering leasing or purchasing an asset with the following cash flows: If you lease, you have a payment at t-0. If you purchase, you pay the cost at t-o 20,000.00 Asset Cost Annual Lease Payment 5,500.00 Residual Value, Year 3 4,000.00 Value of the Asset at End Year 3 Bank Rate Fill in this Table 15.00% Time (YRS) Purchase C.F. Lease C.F. Difference C.F 2 3 NPV IRR of Diff of C.F a. Calculate the present value of the lease versus the purchase, Which is preferable? b.What is the largest annual lease payment you would be willing to pay that will make the leasing more attractive? (Hint: Use Solver)

Explanation / Answer

The neagtive sign shows the cost (Cash outflow)

a. The purchase is more attrative because the NPV of costs is lower for purchasing than leasing.

In other words, purchase has a lower net present cost than leasing

b. When we make the lease payment of 5,290 the Net present cost of leasing is lower and leasing becomes attrative

YRS Purchase CF Lease CF Difference 0 -20000 -5500 -14500 1 0 -5500 5500 2 0 -5500 5500 3 4000 -5500 9500 NPV -17369.9 -18057.7 687.8031 IRR of Diff of CF 17.58%

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