Question

Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $33,500, and Harold expects to spend about $1,200 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $13,300. Alternatively, Harold could lease the same vehicle for five years at a cost of $4,355 per year, including maintenance. Assume a discount rate of 12 percent. Required: 1. Calculate the net present value of Harold’s options. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign. Round your final answers to 2 decimal places. Do not round intermediate calculations.) 2. Advise Harold about which option he should choose. Lease Option Purchase Option

Answer 1

Net present value = -$30,284.90

Net present value = -$15,699.78

Explanation :

As per the data given in the question,

Particulars Amount Factor Purchase

Cost of new vehicle -$33,500 1 -$33,500.00

Annual Maintenance -$1,200 3.605 -$4,326.00

Less : Salvage value $13,300 0.567 $7,541.10

Net Present value -$30,284.90

Particulars Amount Factor Purchase

Cost of new vehicle $0 1 $-

Annual Maintenance -$4,355 3.605 -$15,699.78

Less : Salvage value $0 0.567 $-

Net Present value -$15,699.78

We simply multiplied the amount with the factor so that the purchase amount could come