Question

In: Finance

Sydney is deciding whether to buy or lease a vehicle for her personal use only. If...

Sydney is deciding whether to buy or lease a vehicle for her personal use only. If Sydney’s cost of funds is 8% per year, which of the following options should she select to acquire the new car?

She should buy the car with no down payment and $700 monthly payments for 5 years

She should buy the car with a $6,000 down payment and $600 monthly payments for 5 years

She should lease the car for $2,000 down, $500 monthly payments for 5 years, and a $10,000 payments at the end of the lease

She should lease the car for $4000 down, $550 monthly payments for 5 years, and a $5,000 payment at the end of the lease.

Solutions

Expert Solution

Hello Sir/ Mam

Evaluation Table of each of the options @ 8% cost of funds and calculation of Present Value :

Option 1 Option 2 Option 3 Option 4
Time Discounting Factor Cash Flows Present Value Cash Flows Present Value Cash Flows Present Value Cash Flows Present Value
0 1.000 $0.00 $0.00 $6,000.00 $6,000.00 $2,000.00 $2,000.00 $4,000.00 $4,000.00
1 0.993 $700.00 $695.36 $600.00 $596.03 $500.00 $496.69 $550.00 $546.36
2 0.987 $700.00 $690.76 $600.00 $592.08 $500.00 $493.40 $550.00 $542.74
3 0.980 $700.00 $686.18 $600.00 $588.16 $500.00 $490.13 $550.00 $539.15
4 0.974 $700.00 $681.64 $600.00 $584.26 $500.00 $486.89 $550.00 $535.57
5 0.967 $700.00 $677.13 $600.00 $580.39 $500.00 $483.66 $550.00 $532.03
6 0.961 $700.00 $672.64 $600.00 $576.55 $500.00 $480.46 $550.00 $528.50
7 0.955 $700.00 $668.19 $600.00 $572.73 $500.00 $477.28 $550.00 $525.00
8 0.948 $700.00 $663.76 $600.00 $568.94 $500.00 $474.12 $550.00 $521.53
9 0.942 $700.00 $659.37 $600.00 $565.17 $500.00 $470.98 $550.00 $518.07
10 0.936 $700.00 $655.00 $600.00 $561.43 $500.00 $467.86 $550.00 $514.64
11 0.930 $700.00 $650.66 $600.00 $557.71 $500.00 $464.76 $550.00 $511.23
12 0.923 $700.00 $646.35 $600.00 $554.02 $500.00 $461.68 $550.00 $507.85
13 0.917 $700.00 $642.07 $600.00 $550.35 $500.00 $458.62 $550.00 $504.49
14 0.911 $700.00 $637.82 $600.00 $546.70 $500.00 $455.59 $550.00 $501.14
15 0.905 $700.00 $633.60 $600.00 $543.08 $500.00 $452.57 $550.00 $497.83
16 0.899 $700.00 $629.40 $600.00 $539.49 $500.00 $449.57 $550.00 $494.53
17 0.893 $700.00 $625.23 $600.00 $535.91 $500.00 $446.59 $550.00 $491.25
18 0.887 $700.00 $621.09 $600.00 $532.36 $500.00 $443.64 $550.00 $488.00
19 0.881 $700.00 $616.98 $600.00 $528.84 $500.00 $440.70 $550.00 $484.77
20 0.876 $700.00 $612.89 $600.00 $525.34 $500.00 $437.78 $550.00 $481.56
21 0.870 $700.00 $608.83 $600.00 $521.86 $500.00 $434.88 $550.00 $478.37
22 0.864 $700.00 $604.80 $600.00 $518.40 $500.00 $432.00 $550.00 $475.20
23 0.858 $700.00 $600.80 $600.00 $514.97 $500.00 $429.14 $550.00 $472.05
24 0.853 $700.00 $596.82 $600.00 $511.56 $500.00 $426.30 $550.00 $468.93
25 0.847 $700.00 $592.87 $600.00 $508.17 $500.00 $423.48 $550.00 $465.82
26 0.841 $700.00 $588.94 $600.00 $504.80 $500.00 $420.67 $550.00 $462.74
27 0.836 $700.00 $585.04 $600.00 $501.46 $500.00 $417.88 $550.00 $459.67
28 0.830 $700.00 $581.16 $600.00 $498.14 $500.00 $415.12 $550.00 $456.63
29 0.825 $700.00 $577.32 $600.00 $494.84 $500.00 $412.37 $550.00 $453.60
30 0.819 $700.00 $573.49 $600.00 $491.56 $500.00 $409.64 $550.00 $450.60
31 0.814 $700.00 $569.69 $600.00 $488.31 $500.00 $406.92 $550.00 $447.62
32 0.808 $700.00 $565.92 $600.00 $485.08 $500.00 $404.23 $550.00 $444.65
33 0.803 $700.00 $562.17 $600.00 $481.86 $500.00 $401.55 $550.00 $441.71
34 0.798 $700.00 $558.45 $600.00 $478.67 $500.00 $398.89 $550.00 $438.78
35 0.793 $700.00 $554.75 $600.00 $475.50 $500.00 $396.25 $550.00 $435.88
36 0.787 $700.00 $551.08 $600.00 $472.35 $500.00 $393.63 $550.00 $432.99
37 0.782 $700.00 $547.43 $600.00 $469.22 $500.00 $391.02 $550.00 $430.12
38 0.777 $700.00 $543.80 $600.00 $466.12 $500.00 $388.43 $550.00 $427.27
39 0.772 $700.00 $540.20 $600.00 $463.03 $500.00 $385.86 $550.00 $424.44
40 0.767 $700.00 $536.62 $600.00 $459.96 $500.00 $383.30 $550.00 $421.63
41 0.762 $700.00 $533.07 $600.00 $456.92 $500.00 $380.76 $550.00 $418.84
42 0.756 $700.00 $529.54 $600.00 $453.89 $500.00 $378.24 $550.00 $416.07
43 0.751 $700.00 $526.03 $600.00 $450.89 $500.00 $375.74 $550.00 $413.31
44 0.746 $700.00 $522.55 $600.00 $447.90 $500.00 $373.25 $550.00 $410.57
45 0.742 $700.00 $519.09 $600.00 $444.93 $500.00 $370.78 $550.00 $407.86
46 0.737 $700.00 $515.65 $600.00 $441.99 $500.00 $368.32 $550.00 $405.15
47 0.732 $700.00 $512.24 $600.00 $439.06 $500.00 $365.88 $550.00 $402.47
48 0.727 $700.00 $508.84 $600.00 $436.15 $500.00 $363.46 $550.00 $399.81
49 0.722 $700.00 $505.47 $600.00 $433.26 $500.00 $361.05 $550.00 $397.16
50 0.717 $700.00 $502.13 $600.00 $430.39 $500.00 $358.66 $550.00 $394.53
51 0.713 $700.00 $498.80 $600.00 $427.54 $500.00 $356.29 $550.00 $391.92
52 0.708 $700.00 $495.50 $600.00 $424.71 $500.00 $353.93 $550.00 $389.32
53 0.703 $700.00 $492.22 $600.00 $421.90 $500.00 $351.58 $550.00 $386.74
54 0.699 $700.00 $488.96 $600.00 $419.11 $500.00 $349.26 $550.00 $384.18
55 0.694 $700.00 $485.72 $600.00 $416.33 $500.00 $346.94 $550.00 $381.64
56 0.689 $700.00 $482.50 $600.00 $413.57 $500.00 $344.64 $550.00 $379.11
57 0.685 $700.00 $479.31 $600.00 $410.83 $500.00 $342.36 $550.00 $376.60
58 0.680 $700.00 $476.13 $600.00 $408.11 $500.00 $340.09 $550.00 $374.10
59 0.676 $700.00 $472.98 $600.00 $405.41 $500.00 $337.84 $550.00 $371.63
60 0.671 $700.00 $469.85 $600.00 $402.73 $10,500.00 $7,047.71 $5,550.00 $3,725.22
$34,522.90 $35,591.06 $33,371.32 $34,481.19

As it is clearly evident from the table, OPTION C requires the least amount of time adjusted cashflow. Hence, OPTION C is better.

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.


Related Solutions

Lease or Buy You are deciding whether to lease or purchase a car. If you lease...
Lease or Buy You are deciding whether to lease or purchase a car. If you lease the car, your annual payments will be $7,400 for the next four years (due at year end). If you buy the car, you will pay $30,000 to purchase the car. You estimate the car will have a resale value of $12,000 at the end of four years. Assume the appropriate discount rate is 10%. Should you lease or buy the car? To answer this...
Your friend Harold is trying to decide whether to buy or lease his next vehicle. He...
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 $34,500, and Harold expects to spend about $1,300 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $13,700. Alternatively, Harold could lease the same vehicle for five years at a cost...
Your friend Harold is trying to decide whether to buy or lease his next vehicle. He...
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 $31,500, and Harold expects to spend about $1,000 per year in maintenance costs. He would keep the vehicle for five years and estimates that the salvage value will be $12,500. Alternatively, Harold could lease the same vehicle for five years at a cost...
A contractor is considering whether to buy or lease a new machine for her layout site...
A contractor is considering whether to buy or lease a new machine for her layout site work. Buying a new machine will cost $12,000 with a salvage value of $1200 after the machine's useful life of 8 years. On the other hand, leasing requires an annual lease payment of $3000, which occurs at the state of each year. The MARR is 15%. On the basis of an internal rate of return analysis, which alternative sgould the contractor be advised to...
You are deciding whether to lease or purchase a car. If you lease the car, your...
You are deciding whether to lease or purchase a car. If you lease the car, your annual payments will be $7,400 for the next four years (due at year end). If you buy the car, you will pay $30,000 to purchase the car. You estimate the car will have a resale value of $12,000 at the end of four years. Assume the appropriate discount rate is 10%. Should you lease or buy the car? To answer this question, assume the...
A company is deciding whether to lease or purchase an asset. In this question we will...
A company is deciding whether to lease or purchase an asset. In this question we will evaluate the NPV of the purchase decision. The capital cost required to purchase the asset is $1,000,000 (at time zero) with a salvage value of $500,000 at the end of the 5th year. The purchased asset can be depreciated based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS (Links to an external site.)Links to an external site.) over...
A company is deciding whether to lease or purchase an asset. In this question we will...
A company is deciding whether to lease or purchase an asset. In this question we will evaluate the NPV of the purchase decision. The capital cost required to purchase the asset is $1,000,000 (at time zero) with a salvage value of $500,000 at the end of the 5th year. The purchased asset can be depreciated based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS) over six years (from year 0 to year 5). The...
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it.
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it. Three stores carry the same dress, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $103 for the dress:StoreTravel Time Each WayPrice of a Dress(Minutes)(Dollars per dress)Local Department Store15103Across Town3089Neighboring City6063Juanita makes $16 an...
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it. Three stores carry the same dress, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $129 for the dress:StoreTravel Time Each Way (Minutes)Price of a Dress (Dollars per dress)Local Department Store15129Across Town3086Neighboring City6063Juanita makes \(\$...
You are considering whether to buy or lease a car. If you lease, you have to...
You are considering whether to buy or lease a car. If you lease, you have to pay a refundable security deposit of $5 hundred, and a monthly lease payment of $424 for 3 years, with payments due at the beginning of the month. If you buy, you will pay a downpayment of $21 hundred, and a monthly loan payment of $565, over the same period of time, with payments due at the end of the month. The car is estimated...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT