A farmer is about to make a lease or buy decision about a tractor. The tractor is financed at an interest rate of 8% for seven years, with an annual payment of $10 564. The cash flows of both options for seven years and the factors taken into consideration are summarized in the table below. Also, it is assumed that there are no repair costs associated with leasing the equipment. (a) Using net present value of cost, determine the best approach for the farmer. Purchase (b) Explain why fuel cost is not included in the comparison.
A farmer is about to make a lease or buy decision about a tractor. The tractor is financed at an interest rate of 8% for seven years, with an annual payment of $10 564. The cash flows of both options for seven years and the factors taken into consideration are summarized in the table below. Also, it is assumed that there are no repair costs associated with leasing the equipment. (a) Using net present value of cost, determine the best approach for the farmer. Purchase (b) Explain why fuel cost is not included in the comparison.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
- A farmer is about to make a lease or buy decision about a tractor. The tractor is
financed at an interest rate of 8% for seven years, with an annual payment of $10 564.
The cash flows of both options for seven years and the factors taken into consideration
are summarized in the table below. Also, it is assumed that there are no repair costs
associated with leasing the equipment.
(a) Using
Purchase
(b) Explain why fuel cost is not included in the comparison.
Transcribed Image Text:Year
Buy option
Down payment
Repairs
Loan payment
Tax reduction
Salvage value
Lease option
Up-front charges
Lease cost
Tax reduction
Lease penalty
1
5 000
1 000
10 564
3912
3 000
7 500
2940
2
1 500
10 564
3 914
7 500
2 100
3
2 500
10 564
4 045
7 500
2 380
1 000
4
3 000
10 564
4 024
3 000
7 500
2 940
5
3 500
10 564
3 990
7 500
2 100
6
4 000
10 564
3 942
7 500
2 380
1 000
7
4 500
10 564
3 879
31 000
3 000
7 500
2 940
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