Question

how do I get to the answer?

Main Menu Contents Grades Notes Evaueck Prin Info Course Contents » Exam #4 >> 12-8.problem Print Info The Parker Company has two options for its delivery truck. The first option is to purchase a new truck for $16,200. The new truck will have a useful life of 5 years and a residual value of $2,000. The second option is to rent its existing truck. The total initial cost of renting the truck will be $8,000 and annual operating costs will be $600. Ignore depreciation in consideration of the two options. Using Parker's discount rate of 5%, which option is better and by what amount? At 5% discount rate, the present value of annuity of $1 for 5 years is 4.329, and the present value of $1 for 5 years is 0.784) Incorrect Better to rent by $7,208. Correct: Better to rent by $4,035. Incorrect Better to purchase new by $7,208. Incorrect Better to purchase new by $4,035 Computer's answer now shown above. You are correct. Your receipt no. is 162-3349 Previous Tries Send Feedback This discussion is closed

Answer 1

Purchase:
Purchase cost	16200
Less: Present value of residual value	1568	=2000*0.784
Net Present value	14632
Rent
Initial cost	8000
Add: Present value of annual operating costs	2597	=600*4.329
Net Present value	10597
As net present value of renting is less than that of purchasing, it is better to rent
Difference in favor of Renting	4035	=14632-10597
Better to rent by $4035