Question

CMC Landscaping is considering buying a Ford EV pickup truck for $75,000 cash. The dealer has offered a lease option, in which the company can make 84 monthly payments of $1,263 at each month-end. If CMC values its capital at a cost of 8%, which option is better?

Answer 1

Comparing the present values, the purchase option has a lower present value, indicating that it is the better option. Therefore, CMC Landscaping should choose to buy the Ford EV pickup truck for $75,000 cash.

Step-by-step explanation:

To determine which option is better, we need to calculate the present value of the cash payments for both options. For the purchase option, the present value can be calculated using the formula: PV = CF / (1 + r)^n, where CF is the cash inflow, r is the discount rate, and n is the number of periods. For the lease option, we can calculate the present value of the monthly payments using the same formula.

Let's calculate the present value for both options:

Purchase Option:
PV = $75,000 / (1 + 0.08)^84 = $46,205.73

Lease Option:
PV = $1,263 * 84 / (1 + 0.08)^84 = $84,209.43

Comparing the present values, the purchase option has a lower present value, indicating that it is the better option. Therefore, CMC Landscaping should choose to buy the Ford EV pickup truck for $75,000 cash.