The ABc Corporation is evaualting a potential lease agreement on a truck that costs 40,000 and falls?

into the Marcs 5 year class. The loan rate on the truck would be 10% if ABC decided to borrow and buy rather that lease and the loan would require 5 equal payments due at the end of the year. The truck has a 5 year economic life an an estimated residual value of $10,000 If ABC buys the truck it would purchase a maintenance contract which costs 1000 per year payable at year end The terms lease which include maintenance call for a 10,000 lease pymt at the begininng of each year should they lease por purchase show your work

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  • Anonymous
    1 decade ago
    Best Answer

    Truck costs $40,000

    Buy:

    Loan = $40,000

    Interest = 10% X 5 X $40,000 = $20,000

    Total repayment = $60,000

    Annual repayment = $60,000 / 5 = $12,000

    Residual Value = $10,000

    Maintenance = $1,000

    Total outgoing annual payment = $13,000 at end of year

    Present value = 13,000/1.1 + 13,000/(1.1)^2 + 13,000/(1.1)^3 + 13,000/(1.1)^4 + (13,000 - 10,000)/(1.1)^5 = $43,071

    Lease:

    Present Value = 10,000 + 10,000/1.1 + 10,000/(1.1)^2 + 10,000/(1.1)^3 + 10,000/(1.1)^4 = $41,699

    Answer = lease

  • 1 decade ago

    to buy 40000@10%for 5 years with 1000 per year maintenence

    interest=principal*rate*time=(40000)(.10)(5)=20000 so principal+interest=60000 over 5 years is 12000 per year on loan and 1000 per year maintenence so 13000 per year. in 5 years this is 65000. i assume "residual value" means it can be sold after 5 years for the 10000 as claimed therefore ABC is looking at a net expenditure of 65000-10000=55000 to buy outright

    to lease 10000 a year for 5 years is 50000 maintenence is included and no residual value can be recouped by ABC

    unless there is some adjustment due to the nuance between words "at the end" and words "at the beginning" of the year i conclude that ABC should LEASE NOT BUY due to the 5000 that ABC would save according to these calculations. I am not in the business of corporate equipment aquisition this is just my own observation based on the information provided

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