Question

A rental company is considering the purchase of new trailers to least to customers. Each trailer will cost $20,000 today. Each trailer will bring $10,000.00 in an annual lease for 5 years. The lease is paid at the end of each year. At the end of the 5 years the trailer will have no depreciated or salvage value. The interest to be paid for this investment is 9%. Use this information to complete this table. Would you advise the firm to make this investment at 9%? Why?

Fill out the Table:

Year Future Value Present Value Discount Factor
1
2
3
4
5

Answer 1

Answer and Explanation:

The computation is shown below;

Year Future value present value Discount factors

1 $10,000.00 $9,170 0.917

2 $10,000.00 $8,410 0.841

3 $10,000.00 $7,720 0.772

4 $10,000.00 $7,080 0.708

5 $10,000.00 $6,490 0.649

Now

Net present value = -$20,000 + $10,000(PVIFA 9% 5 Years)

= -$20,000 + $10000 × (3.8897)

= -$20,000+ $38,897

= $18,897

So here the investment should be make as the net present value comes in positive