Homework Answers
Assuming that period is considering in Years for all the options.
A. Buy a new Car :
Initial Price : $26,000
Add: Interest @ 12% (26000*12%* 3years) : $ 9,360
Total Cash out flow : 35,360
Less: Sale value after 3 years : -7,500
Net Cash outflows : 27,860
Annual Cash outflows (27,860/ 3 Years) = 9,286.67
B. Lease a car with $ 700 monthly = $8,400 Annually
Total Cash outflows with 3 years Lease = 8,400 * 3 = $25,200
C. Lease a car with $ 720 monthly = $8,640 Annually
Total Cash outflows with 3 years Lease = 8,640 * 3 = $25,920
As stated in the problem, demand for the car is 3 years. In Option C, buy a car with $7,000 at the end of 3 years, not yet all useful to the Business. Hence not considered while calculating the cash outflows.
Decision : Option B, more beneficial as compare to Option A and Option C.
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