Question

Question 4

A firm can lease a truck for 4 years at a cost of $30,000 annually. It can instead buy a truck at a cost of $80,000, with annual maintenance expenses of $10,000. The truck will be sold at the end of 4 years for $20,000. Which is the better option if the discount rate is 10%? (Please solve with EAA)

Answer 1

Pago Na DATE: First of All, we need to calculate Present Value under Both the option then we will calculate Annual Equivalent Costs under both the options, option which has lowest EAA should be Selected. Calculation of Present Value of lease Payment PV I Crno (Hon where Cfn r n & a = Cash flows discount rate or No. of Periods luterest rate PV + - $ 30000 (lolo $30,000 +-$ 30000 + $ 30000 (1.102 (1.108 (1.1079 PV = $30,000 X 3.1698 =-$ 95096 'PV of leave Payment is $95096

Present value under Calculation of Buying option. PV lola Cloro- - 580000 +-10,000 t - 10000 + 10000 (1.100 (1.10) 10,000 & $20,000 (1010)4 (110) - $ 80000+ - 10,000x 3.1698 + 20,000 x 0.6830 - $ 80,000+ - 31699 + 13660 -$98039 PV PV Calculation of EAA Lease option - Present value PVAF 10%, 4 years - - $95096 - $30,000 3.1698 Buying option - :- $98039 - $ 30928 3.1698 option, because Lease option is better of its lowest EAA.