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Your landscaping company can lease a truck for $7,300 a year (paid at year-end) for 5 years
Your landscaping company can lease a truck for $7,300 a year (paid at year-end) for 5 years. It can instead buy the truck for $32,000. The truck will be valueless after 5 years. The interest rate your company can earn on its funds is 6%.
What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Is it cheaper to buy or lease?
What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
?Is it now cheaper to buy or lease?
Expert Solution
Computation of Present Value of the Cost of Leasing using PV Function in Excel:
=-pv(rate,nper,pmt,fv,type)
Here,
PV = Present Value of Annuity = ?
Rate = 6%
Nper = 5 Years
PMT = $7,300
FV = 0
Substituting the values in formula:
=-pv(6%,5,7300,0)
PV or Present Value of Annuity Due = $30,750.26
It is cheeper to lease as Present Value of the Cost of Leasing is less than Purchase price of truck.
Computation of Present Value of the cost of leasing if the lease payments are an annuity due using PV Function in Excel:
=-pv(rate,nper,pmt,fv,type)
Here,
PV = Present Value of Annuity Due = ?
Rate = 6%
Nper = 5 Years
PMT = $7,300
FV = 0
Type = 1
Substituting the values in formula:
=-pv(6%,5,7300,0,1)
PV or Present Value of Annuity Due = $32,595.27
Now, It is cheeper to buy.
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