Question

You own a construction company and need to need a generator for one of your projects...

You own a construction company and need to need a generator for one of your projects in a remote area. The expected life of the generator is 5 years. You have two options.
Option 1 – Lease
The lease payments are AED 100,000 at the end of each year for 5 years. Annual fuel costs are AED 22,000. All maintenance costs are covered by the lease contract. However you would be required to pay an installation cost of AED 70,000. At the end of the 5-year period there would be a removal cost of AED 40,000
Option 2 – Buy
The purchase price is AED 550,000. Annual fuel costs are the same. Annual maintenance costs are AED 11,000. The salvage value is AED 110,000. The generator will require a major overhaul after the third year costing an additional AED 55,000.
At an interest rate of 10% perform a lease/buy analysis and recommend which option is better.
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