Question

Nissan’s all-electric car, the Leaf, has a base price of $32,780 in the United States, but it is eligible for a $7500 federal tax credit. A consulting engineering company wants to evaluate the purchase or lease of one of the vehicles for use by its employees traveling to job sites in the local area. The cost for leasing the vehicle will be $4200 per year (payable at the end of each year) after an initialization charge of $2500 paid now. If the company purchases the vehicle, it will also purchase a home charging station for $2200 that will be partially offset by a 50% tax credit. If the company expects to be able to sell the car and charging station for 40% of the base price of the car alone at the end of 3 years, should the company purchase or lease the car? Use an interest rate of 10% per year and annual worth analysis

Answer 1

Solution:
The requirement of the question
To lease or to buy
Option A: Lease
Cost of Leasing: $4200 per year
Initial Outflow: $2500
Year	Cash Outflow		Present value factor@10%		Amount
0	2500		1		2500
1	4200		0.909		3817.8
2	4200		0.826		3469.2
3	4200		0.751		3154.2
				Cost of Leasing	12941.2
				Round off	$12941
Option B: Purchase
Outflow:
Base Price of a car = $32780
Purchase of Home Charging Station = $2200				(50% Tax Credit Allowed)
Total Outflow = 32780+2200 = $ 34980
Inflow :
Tax Credit @ 50% = 2200*50%= $1100
Sell of the car and charging Station for 40% of the base Price in 3rd Year
32780+2200 = 34980 *40% = $13992*.751 = $10507				(Present value factor @ 10% 3 year i.e. .751)
Federal Tax Credit = $7500
Total Inflow = 1100+10507+7500= $ 19107
Net Ouflow = $34980 - $19107 = $ 15873
ADVICE:
Option A of Leasing Is preferable