Question

Your landscaping company can lease a truck for $7,800 a year (paid at year-end) for 6 years. It can instead buy the truck for $38,000. The truck will be valueless after 6 years. The interest rate your company can earn on its funds is 7%.a. What is the present value of the cost of leasing?b. Is it cheaper to buy or lease? c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? d. Is it now cheaper to buy or lease? a) Present value of lease b) Is it cheaper to buy or lease? c) Present value of lease d) Is it now cheaper to buy or lease?

Answer 1

Answer:

Landscaping Company

a. The present value of the cost of leasing is:

= $37,179.01.

b. It is cheaper to lease than to buy.

c. The present value of the cost of leasing if the lease payments are an annuity due is:

= $39,781.54.

d. It is now cheaper to buy than to lease.

Explanation:

a) Data and Calculations:

Annual cost of leasing a truck = $7,800

Lease period = 6 years

Purchase cost of the truck = $38,000

Salvage value after 6 years = $0

Interest rate on company funds = 7%

N (# of periods)  6

I/Y (Interest per year)  7

PMT (Periodic Payment)  7800

FV (Future Value)  0

Results

PV = $37,179.01

Sum of all periodic payments = $46,800.00

Total Interes = $9,620.99

Present of an Annuity Due:  

Results

PV = $39,781.54

Sum of all periodic payments = $46,800.00

Total Interest = $7,018.46