Question

A firm can lease a truck for 4 years at a cost of $41,000 annually. It can instead buy a truck at a cost of $91,000, with annual maintenance expenses of $21,000. The truck will be sold at the end of 4 years for $31,000. a. Calculate present value if the discount rate is 10%

Answer 1

PV of Truck Purchase:

PV = CF * PVF(r%,n)

PVF = 1/ (1+r)^n

r is disc Rate and n is time period.

Year	Particulars	CF	PVF @10%	Disc CF
0	Purchase Cost	$ 91,000.00	1.0000	$    91,000.00
1	Annual Maintenance	$ 21,000.00	0.9091	$    19,090.91
2	Annual Maintenance	$ 21,000.00	0.8264	$    17,355.37
3	Annual Maintenance	$ 21,000.00	0.7513	$    15,777.61
4	Annual Maintenance	$ 21,000.00	0.6830	$    14,343.28
4	Sale Value	$ -31,000.00	0.6830	$   -21,173.42
PV of Cash Outflows under pUrchase Option				$ 1,36,393.76

PV in case of Lease:

Year	Particulars	CF	PVF @10%	Disc CF
1	Lease	$ 41,000.00	0.9091	$    37,272.73
2	Lease	$ 41,000.00	0.8264	$    33,884.30
3	Lease	$ 41,000.00	0.7513	$    30,803.91
4	Lease	$ 41,000.00	0.6830	$    28,003.55
PV of Cash Outflows under Lease Option				$ 1,29,964.48

Lesser CFs under Lease option by 6429.28. Hence Lease is adviced.