Question

A firm can lease a truck for 4 years at a cost of $38,000 annually. It can instead buy a truck at a cost of $88,000, with annual maintenance expenses of $18,000. The truck will be sold at the end of 4 years for $28,000. a. What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 16%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

If It can Buy a truck
Cost Paid
Year	Initial Cost	Annual Cost	Residual Value	Total Cost	PVF @16%	PV
0	38000	0	0	38000	1	38000
1	0	18000	0	18000	0.862069	15517.24
2	0	18000	0	18000	0.743163	13376.93
3	0	18000	0	18000	0.640658	11531.84
4	0	18000	28000	-10000	0.552291	-5522.91
					Total PV	72903.1
	PV	72903.1
	FVF(16%,4)	1.810639
	Future Value	132001.2
Now to Find Equivalent annual cost of buying and maintenance
	Equivalent Annual Cost		FV/PVAF(16%,4)
		=	132001.2/2.79818
		Answer	47173.949
Assume maintenance cost is paid at the end of year

Lease is more benficial