can either pay the lease costs up-front for three years, or it can pay it in annual payments at the sta of each year. If the up-front cost is £24,000 for 3 years, or the alternative is an annual cost of £8000 (payable at the beginning of each year), determine whether it is best to pay up-front or by yearly payments, over a 3-year period. You will need to
can either pay the lease costs up-front for three years, or it can pay it in annual payments at the sta of each year. If the up-front cost is £24,000 for 3 years, or the alternative is an annual cost of £8000 (payable at the beginning of each year), determine whether it is best to pay up-front or by yearly payments, over a 3-year period. You will need to
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:small company has to lease a truck. The company
can either pay the lease costs up-front for three
years, or it can pay it in annual payments at the start
of each year. If the up-front cost is £24,000 for 3
years, or the alternative is an annual cost of £8000
(payable at the beginning of each year), determine
whether it is best to pay up-front or by yearly
payments, over a 3-year period. You will need to
take into account that the inflation rate is 5% per
year and the annual payment scheme will be
subject to inflation rate rises. Also the bank interest
rate is 3%. To do this you will need to determine the
Net Present Value (NPV) costs of each method of
payment.
What would happen if the bank interest rate
increased to 9%? Would this affect your decision?
The formula for NPV is:
X (1+r)t
Where X is the amount to be adjusted, r is the
interest rate as a fraction and t is the time period.
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