Question

A diesel generator for electrical power can be purchased by a remote community for $350,000 and used for 10 years, when its salvage value is $50,000. Alternatively, it can be leased for $42,500 a year. (Remember that lease payments occur at the start of the year.) The community’s interest rate is 7%

What is the interest rate for buying versus leasing? What is the better choice?

The community will spend $80,000 less each year for fuel and maintenance, that it currently spends on buying power. Should it obtain a generator? What is the rate of return for generator using the best financing plan?

Answer 1

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