lease or buy a car?
Lease or buy decision. A small sales company is committed to supplying three sales representatives with new cars. The company has two alternatives. It can either buy the three cars and sell them after two years, or it can lease the cars for two years. The company uses a 16% discount rate. The information for each alternative is as follows:
Alternative 1: Buy Cost $36,000
Annual service costs 3,000
Anticipated repairs during the 1st year 700
Anticipated repairs during the 2nd year 1,500
Salvage value at the end of 2 years 10,000
Alternative 2: Lease
To lease the cars, the company would simply pay $20,000 a year for the two years.
Required:
Assuming the lease is paid at the end of each year, determine the better alternative.
Comments
Discount rate = 16%
Option 1 - Buy
The cost for year 0 is $36,000
The cost for year 1 is $3,000+$700 = $3,700
The cost for year 2 is $3,000+$1,500 = $4,500
Total cost for at end of Year 2 is $44,200
Therefore NPV is $(30,260.57)
Option 2 - Lease
The cost for year 0 is 0
The cost for year 1 is $20,000
The cost for year 2 is $20,000
The total cost at end of Year 2 is $40,000
Therefore NPV is $(27,676.41)
Therefore lease option is better.