Question

A firm can lease a truck for 5 years at a cost of $49,000 annually. It can instead buy a truck at a cost of $99,000, with annual maintenance expenses of $29,000. The truck will be sold at the end of 5 years for $39,000. a. What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 12%

Answer 1

Leasing or Buying a Truck:

The equivalent annual cost of buying and maintaining the truck (if the discount rate is 12%) is:

= $50,328

Step-by-step explanation:

a) Data and Calculations:

Interest rate = 6% per year

Lease Purchase

Initial Cost $99,000

Annual Cost $49,000 $29,000

Salvage Value $39,000

Useful Life (years) 5 5

Annuity factor = 3.605 for 5 years at 12%.

Present value factor = 0.567 for 5 years at 12%.

Lease Purchase

Present value of costs:

Initial cost $99,000 (1 * $99,000)

Annuity costs $176,645 104,545 (3.605 * $29,000)

PV of salvage value (22,113) (0.567 * $39,000)

NPV cost $176,645 $181,432

The equivalent annual cost:

= Total NPV cost/PV annuity factor

($176,645/3.605) ($181,432/3.605)

Equivalent annual cost $49,000 $50,328

Difference:

Purchase = $50,328

Lease = $49,000

Difference = $1,328