Question

Select the best option to acquire construction equipments: Red Bird Construction company is considering three different acquisition methods for obtaining pickup trucks. Interest rate: 8% 1) Option A: Immediate cash purchase the trucks for $16,800 each, and after 4 years sell each truck for an estimated $5,000. 2) Option B: To lease the trucks for 4 years for $4,100 per year paid in advance at the beginning of each year. The contractor pays all operating and maintenance costs for the trucks, and the leasing company retains the ownership 3) Option C: To purchase the trucks using a time payment plan requiring an immediate down payment of $4,000 and $3,370 per year at the end of each year for 4 years. Assume the trucks will be sold after 4 years for $5,000 each. Dept. of Technology, ISU

Answer 1

OPTION A

1 Option A Immediate cash purchase Particular O Purchase 4 Sell Amount PV factor@8% Discounted cash flow 16,800.00 16,800.00 5,000.00 0.735 3,675.00 Present value of outflow 13,125.00

OPTION B

2 Option B Lease the truck Year Particular Amount PV factor@8% Discounted cash flow O Lease 4,100.00 4100 1 Lease 4,100.00 0.9259 3796.19 2 Lease 4,100.00 0.8573 3514.93 3 Lease 4,100.00 0.7938 3254.58 Present value of outflow 14,665.70

OPTION C

3 Option C PURCHASE TIME PAYMENT PLAN Year Particular Amount 0 Downpayment 4,000.00 1 Balance payment 3,370.00 2 Balance payment 3,370.00 3 Balance payment 3,370.00 4 Balance payment 3,370.00 4 Sale 5,000.00 PV factor@8% Discounted cash flow 4,000.00 0.9259 3,120.28 0.8573 2,889.10 0.7938 2,675.11 0.735 2,476.95 0.735 (3,675.00) Present value of outflow 11,486.44

From above analysis option c seems to be more optimal.