Question

A construction firm needs a front-end loader. The loader can be leased from the dealer for 3 years for $7,400 per year including all maintenance, or it can be purchased for $30,000. The firm expects the loader to have a salvage value of $7,500 after 7 years. Maintenance will cost $750 in the first year and increase by $350 each year. The firm’s interest rate is 10% per year. a) What is the EUAC for leasing the loader ($/year)?

b) What is the EUAC for purchasing the loader ($/year)?

c) If the interest rate is 12% per year, which option is preferred (Lease or Buy)?

Answer 1

Investment in loader =30000

Maintenance cost in the first year is 750 and then increasing by 350 every year

Salvage value = 7500 after 7 years

i=10%=0.1

Lease availiable at 7400 every year

a) EUAC of lease = -7400

b) EUAC of purchasing = -30000 * (A/P,10%,7)-750-350*(A/G, 10%, 7)+7500*(A/F,10%,7)

= -30000 * 0.205405 -750 - 350* 2.621615 +7500*0.105405

= -7039.18

We will select to purchase the front end loader as EUAC of purchase is less

c)

i=12%

EUAC of lease = -7400

EUAC of purchase = -30000 * (A/P,12%,7)-750-350*(A/G, 12%, 7)+7500*(A/F,12%,7)

= -30000*0.219118-750-350*2.551465+7500*0.099118

= -7473.17

We will lease the front end loader as its EUAC is now less