Question

5. You’re considering buying an asset that has a 3-year life and costs $2,000. As an alternative to buying the asset, you can lease it for $600 per year (four annual payments, the first due today). Your bank is willing to lend you money for 15%. a. Should you lease or purchase the asset? b. What is the largest lease payment you would be willing to make? (Lease; $609.16)

EXCEL FORMAT

Answer 1

Lease payments = $600

Year	0	1	2	3
Lease Payments(n)	$600	$600	$600	$600
PVIF(n)	1.0000	0.8696	0.7561	0.6575
PVCF = Lease Payments(n)*PVIF(n)	$600.0000	$521.7391	$453.6862	$394.5097

PVIF(n) = 1/(1+r)^n {where as n= nth year of PVIF ; r = discount rate/interest rate from bank @15%}

Present Value of Future Lease payments = $600.0000 + $521.7391 + $453.6862 + $394.5097

= $1969.9350

So the above present valueof future lease payments is less than the $2000 price of an asset. So, I would lease the asset as it more cheeper option.

If to find the maximum lease payment for the asset:

Present value of Lease payments = $2000

2000 = x + x/(1.15) + x/(1.15^2) + x/(1.15^3)

2000 = x*(3.2832)

x = $609.1571