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 $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 of $4,485 per year, including maintenance. Assume a discount rate of 11 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.)

         

Answer 1

	CALCULATION OF THE NET PRESENT VALUE OF THE PURHCASE OPTION
	Year	Cash Flow	PVF @ 11%	Present Value
	0	$            34,500.00	1.0000	$    34,500.00
	1	$              1,300.00	0.9009	$      1,171.17
	2	$              1,300.00	0.8116	$      1,055.11
	3	$              1,300.00	0.7312	$          950.55
	4	$              1,300.00	0.6587	$          856.35
	5	$              1,300.00	0.5935	$          771.49
	Salvage Value - 5th Yr	$          -13,700.00	0.5935	$     -8,130.28
		Total		$    31,174.38
	CALCULATION OF THE NET PRESENT VALUE OF THE LEASE OPTION
	(Assume the first lease payment is made at the starting of the year)
	Year	Cash Flow	PVF @ 11%	Present Value
	0	$              4,485.00	1.0000	$      4,485.00
	1	$              4,485.00	0.9009	$      4,040.54
	2	$              4,485.00	0.8116	$      3,640.13
	3	$              4,485.00	0.7312	$      3,279.39
	4	$              4,485.00	0.6587	$      2,954.41
		Total		$    18,399.47
	Answer =
	Ner present Value of
	Purhcase=	$            31,174.38
	Leasae =	$            18,399.47