You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $503 per month per cab, or you can purchase the cabs outright for $30,200, in which case the cabs will last eight years. You must return the cabs to the leasing company at the end of the lease. The leasing company is responsible for all maintenance costs, but if you purchase the cabs, you will buy a maintenance contract that will cost $108 per month for the life of each cab. Each cab will generate revenues of $1,072 per month. Assume the cost of capital is fixed at 12.5%. (Hint: Make sure to round all intermediate calculations to at least four decimal places.) a. Calculate the NPV per cab of both possibilities: purchasing the cabs or leasing them. b. Calculate the equivalent monthly benefit of both opportunities. c. If you are leasing a cab, you have the opportunity to buy the used cab after five years. Assume that in five years a five-year-old cab will cost either $10,000 or $16,300, with equal likelihood; will have maintenance costs of $490 per month; and will last three more years. Which option should you take? a. Calculate the NPV per cab of both possibilities: purchasing the cabs or leasing them. The NPV of leasing the cabs is $ per cab. (Round to the nearest dollar.)
You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $503 per month per cab, or you can purchase the cabs outright for $30,200, in which case the cabs will last eight years. You must return the cabs to the leasing company at the end of the lease. The leasing company is responsible for all maintenance costs, but if you purchase the cabs, you will buy a maintenance contract that will cost $108 per month for the life of each cab. Each cab will generate revenues of $1,072 per month. Assume the cost of capital is fixed at 12.5%. (Hint: Make sure to round all intermediate calculations to at least four decimal places.) a. Calculate the NPV per cab of both possibilities: purchasing the cabs or leasing them. b. Calculate the equivalent monthly benefit of both opportunities. c. If you are leasing a cab, you have the opportunity to buy the used cab after five years. Assume that in five years a five-year-old cab will cost either $10,000 or $16,300, with equal likelihood; will have maintenance costs of $490 per month; and will last three more years. Which option should you take? a. Calculate the NPV per cab of both possibilities: purchasing the cabs or leasing them. The NPV of leasing the cabs is $ per cab. (Round to the nearest dollar.)
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
Related questions
Question
Transcribed Image Text:You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $503 per month
per cab, or you can purchase the cabs outright for $30,200, in which case the cabs will last eight years. You must return the cabs to the leasing company at the end of the
lease. The leasing company is responsible for all maintenance costs, but if you purchase the cabs, you will buy a maintenance contract that will cost $108 per month for
the life of each cab. Each cab will generate revenues of $1,072 per month. Assume the cost of capital is fixed at 12.5%. (Hint: Make sure to round all intermediate
calculations to at least four decimal places.)
a. Calculate the NPV per cab of both possibilities: purchasing the cabs or leasing them.
b. Calculate the equivalent monthly benefit of both opportunities.
c. If you are leasing a cab, you have the opportunity to buy the used cab after five years. Assume that in five years a five-year-old cab will cost either $10,000 or $16,300,
with equal likelihood; will have maintenance costs of $490 per month; and will last three more years. Which option should you take?
a. Calculate the NPV per cab of both possibilities: purchasing the cabs or leasing them.
The NPV of leasing the cabs is $ per cab. (Round to the nearest dollar.)
AI-Generated Solution
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
Unlock instant AI solutions
Tap the button
to generate a solution
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education