You own a car rental company, and you have two options to replace your fleet. For...

You own a car rental company, and you have two options to replace your fleet. For each car, you can either enter into a five-year lease for $7,000 per year (pretax) or you can purchase the car for $30,000. You believe the cars will last for 8 years and be worth $4,000 at the end of the 8 years. The lease payments cover maintenance costs, but if you buy the cars, you will pay $1,200 per year (pre-tax) for a maintenance contract on each car and depreciate the cars straight line over eight years. You can then sell the cars at the end of the eighth year. Your required return on this investment is 12% and the firm’s tax rate is 21%. Assume all cash flows occur at the end of the year. What is the EAA of the purchase option, and should you lease or purchase the cars?

Solutions

Expert Solution

Equated Annual Annuity of Lease Option is ($5,530) (Note 1)

Equated Annual Annuity of Purchase Option is ($5,942.67) (Note 2)

Therefore, You should Lease the car as EAA of Lease is less than Purchase

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You own a cab company and are evaluating two options to replace your fleet. Either you...

You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $ 500 $500 per month per cab, or you can purchase the cabs outright for $ 30 comma 000 $30,000, in which case the cabs will last eight years. You must return the cabs to the leasing company at the end of the lease. The leasing company is responsible for all maintenance costs,...

You own a cab company and are evaluating two options to replace your fleet. Either you...

You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $ 548 per month per cab, or you can purchase the cabs outright for $ 30 comma 800, in which case the cabs will last eight years. You must return the cabs to the leasing company at the end of the lease. The leasing company is responsible for all maintenance costs, but if...

You own a cab company and are evaluating two options to replace your fleet. Either you...

You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $ 495$495 per month per cab, or you can purchase the cabs outright for $ 31 comma 600$31,600, in which case the cabs will last eight years. You must return the cabs to the leasing company at the end of the lease. The leasing company is responsible for all maintenance costs, but if...

The Elite Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at...

The Elite Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at a cost of $1,000,000. It expects to keep the autos for only two years and to sell them at the end of that period for 55 percent, on average, of what they cost. The plan is to generate $20,000 of incremental revenue per additional auto in each year of operation. The controller estimates that other costs will amount to 20 cents per kilometre on...

A winter recreational rental company is fencing in a new storage area. They have two options....

A winter recreational rental company is fencing in a new storage area. They have two options. They can set it up at the back corner of the property and fence it in on four sides. Or, they can attach it to the back of their building and fence it in on three sides. The rental company has decided that the storage area needs to be 100 m2 if it is in the back corner or 98 m2 if it is...

A small car rental company has a fleet of 94 vehicles distributed among its 10 agencies....

A small car rental company has a fleet of 94 vehicles distributed among its 10 agencies. The location of every agency is given by its geographical coordinates X and Y in a grid based on kilometers. We assume that the road distance between agencies is approximately 1.3 times the Euclidean distance (as the crow flies). The following table indicates the coordinates of all agencies, the number of cars required the next morning, and the stock of cars in the evening...

A small car rental company has a fleet of 94 vehicles distributed among its 10 agencies....

H and V Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles...

H and V Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at a cost of $1,000,000. It expects to keep the autos for only two years and to sell them at the end of that period for 55 percent, on average, of what they cost. The plan is to generate $20,000 of incremental revenue per additional auto in each year of operation. The controller estimates that other costs will amount to 20 cents per kilometre...

u are looking for a car and have narrowed it down to two options. You can...

u are looking for a car and have narrowed it down to two options. You can buy a new car at a cost of $23,995, which has estimated life of 12 years and annual maintenance costs of $750 per year. Your second option is a used car at a cost of $14,225, with an estimated remaining life of 7 years and annual maintenance costs of $1800 per year. Which is the cheaper option, given your borrowing cost of 7%?

You own a franchise of rental car agencies in Florida. You recently read a report indicating...

You own a franchise of rental car agencies in Florida. You recently read a report indicating that about 80 percent of all tourists visit Florida during the winter months in any given year, and that 60 percent of all tourists traveling to Florida by air rent automobiles. Travelers not planning ahead often have great difficulty finding rental cars due to high demand. However, during non winter months tourism drops dramatically, and travelers have no problem securing rental car reservations. Determine...

Subjects