Question

You need a truck, which you can either buy or lease. You can buy the truck for $45,000 and sell it after 6 years for $8,000. What is the maximum amount that you would pay per year to lease rather than to buy if the discount rate is 8 percent per year? Assume that the lease payments are annual and payable at the beginning of each year

Answer 1

	Particulars	Amount in $			NOTE
	Purchase price of truck	45,000.00			Year	Discount factor@8%
Less:	Present value of salvage	5,041.60	(8000*0.6302)		1	0.9259
	Cost of buying	39,958.40			2	0.8573
					3	0.7938
	Maximum amount would pay per year to lease rather then buy is	8,003.36			4	0.7350
					5	0.6806
	Let the annual lease payment be x				6	0.6302
	Lease payments are made at the beginning				Annuity value for 5years=	3.9927
	So, x+(x*3.9927)=39958.40
	x=8003.36