A farmer is about to make a lease or buy decision about a tractor. The tractor is financed at an interest rate of 8% for seven years, with an annual payment of $10 564. The cash flows of both options for seven years and the factors taken into consideration are summarized in the table below. Also, it is assumed that there are no repair costs associated with leasing the equipment. (a) Using net present value of cost, determine the best approach for the farmer. Purchase
A farmer is about to make a lease or buy decision about a tractor. The tractor is financed at an interest rate of 8% for seven years, with an annual payment of $10 564. The cash flows of both options for seven years and the factors taken into consideration are summarized in the table below. Also, it is assumed that there are no repair costs associated with leasing the equipment. (a) Using net present value of cost, determine the best approach for the farmer. Purchase
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
A farmer is about to make a lease or buy decision about a tractor. The tractor is
financed at an interest rate of 8% for seven years, with an annual payment of $10 564.
The cash flows of both options for seven years and the factors taken into consideration
are summarized in the table below. Also, it is assumed that there are no repair costs
associated with leasing the equipment.
(a) Using
Purchase
(b) Explain why fuel cost is not included in the comparison.
Transcribed Image Text:Year
Buy option
Down payment
Repairs
Loan payment
Tax reduction
Salvage value
Lease option
Up-front charges
Lease cost
Tax reduction
Lease penalty
1
5 000
1 000
10 564
3912
3 000
7 500
2940
2
1 500
10 564
3 914
7 500
2 100
3
2 500
10 564
4 045
7 500
2 380
1 000
4
3 000
10 564
4 024
3 000
7 500
2 940
5
3 500
10 564
3 990
7 500
2 100
6
4 000
10 564
3 942
7 500
2 380
1 000
7
4 500
10 564
3 879
31 000
3 000
7 500
2 940
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education