The Hole-in-the-Wall Camp is trying to decide whether it should lease a new handicapped transport van or buy one. The lease would be for four years and call for the $7,700 annual payments including maintenance and insurance that are shown in the column labeled Ac€A?LeaseAc€?? below. As an accommodation to the camp, the leasing company has agreed to accept all payments, except the $2,500 cost of preparing the car for delivery, at the end of the each year of the lease. At the end of the lease, the van would be the property of the leasing company. If they buy the van, the Camp plans on using it for six years. They will pay $31,000 to buy the van, $2,250 each year for maintenance and insurance and will be able to sell the van for $10,000 at the end of the sixth year. The cash flows associated with owning the van and using if for six years are in the column labeled Ac€A?OwnAc€?? below.
The Camp was not able to negotiate a six-year lease for the van. If the cost of capital for the camp is 8%, which option should the camp take? Please show your work.
|
Period
|
Lease
|
Own
|
|
0
|
($2,500)
|
($31,000)
|
|
1
|
($7,700)
|
($2,250)
|
|
2
|
($7,700)
|
($2,250)
|
|
3
|
($7,700)
|
($2,250)
|
|
4
|
($7,700)
|
($2,250)
|
|
5
|
|
($2,250)
|
|
6
|
|
$7,750
|
|
|
|
|
Total
|
($33,300)
|
($34,500)
|