Question

Cost of owning and cost of leasing tables are reproduced below.

Using the appropriate table from the Chapter 12 Appendix, record the present value factor at 10% for each year and compute the present value cost of owning and the present value of leasing. Which alternative is more desirable at this interest rate? Do you think your answer would change if the interest rate were six percent instead of ten percent?

Cost of Owning- Anywhere Clinic - Comparative Present Value

For-Profit Cost of Owning:	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Net Cash Flow	(48,750)	2,500	2,500	2,500	2,500	5,000
Present value factor
Present value answers =
Present value cost of owning =

Cost of Leasing- Anywhere Clinic - Comparative Present Value

For-Profit Cost of Leasing:	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Net Cash Flow	(8,250)	(8,250)	(8,250)	(8,250)	(8,250)	---
Present value factor						---
Present value answers =
Present value cost of leasing =

Answer 1

Formula: Present Value Factor for year i = 1/(1+r)ⁱ {given: i=1 to 5, r=10%}

Present value answers = NetCashFlow_i * PresentValueFactor_i

We set up in Excel, for r=10%, we see below PV(cost of owning) has higher negative value than PV(cost of leasing). So at r=10%, leasing should be preferred.

Excel Formula for reference:

If we simply change r to 6% in our Excel setup (shown below), we get PV(leasing) has greater negative value as compared to PV(owning). So at 6%, owning is preferred.