Question

A car dealer leases a small computer with software for $5,000 per year. As an alterative he could buy the computer for $7,500 and lease the software for $3,500 per year. Any time he would decide to switch to some other computer he could cancel software lease and sell the computer for $500.  

If he buys the computer nad leases the software, what is the payback period?

a. 3 years

b. 4 years

c. 5 years

d. 6 years

If he kept the computer and software for 8 years, what would be the benefit-cost ratio, based on a 5% interest rate.  

a. 1.5

b. 1.4

c. 1.3

d. 1.2

Answer 1

1) Cost of total lease, T= 5000*N, where, N= no of years

Cost of software only lease, S= (7500-500)+3500 * N

Setting S = T and solving for N gives = 7000/1500= 4.6 years

Since you can lease only one year at a time then payback would be in 5 years.

This ofcouurse doesnot include the time value of money (i.e the interset yoy could make while investing the money you initially save by leasing.)

2) Benefit Cost ratio= Equivalent Net Benefits/ Equivalent Net Cost

Therefor the answer is 1.3