Question

A construction company is considering investing $80,000 in a dump truck. The truck will last 5 years, at which time it will be sold for $15,000. The maintenance cost at the end of the first year is estimated to be $9,000. Maintenance costs for the truck are estimated to increase by $1000 per year over its life. As an alternative, the company may lease the truck from a dealership for $X per year, including maintenance.

Required:
a. Draw a cash flow diagram of both alternatives.
b. For what value of X should the company lease the truck if the company does business with a MARR of 7%. Assume end-of-year lease payments.

Answer 1

a) attached below

b) X < 2.7767.8

Step-by-step explanation:

Working with the information available

a) Diagram of the cash flow of both alternatives ( Buying and leasing alternatives )

attached below

b) Determine the value of X if the company leases the truck

Given that : MARR = 7%

assuming end-of-year lease payments

Note : The company will only lease the truck if the cost of buying the truck is higher than the cost of leasing in the long term

∴ we will calculate for The cost of buying ( equivalent annual cost )

= -8000( A/P, 7%, 5 ) - 9000 - 1000 (A/G, 7%, 5 ) + 15000 (A/F, 7%, 5 )

= - 27767.8

Hence the value of X that the company should lease instead of buying will be : X < 2.7767.8