Company is considering two options for its delivery cars The

Company is considering two options for its delivery cars. The first option is to and the second is a leasing option. The study period is no more than 24 months The annual lease cost is paid at the beginning of each year and is partially used years. month the first cost and net cash flow estimates to determine the payback in months 12% per year return for the purchase option and lease option.

Solution

Working Notes:

(1)

Net monthly benefit = Monthly revenue - Monthly cost

For Purchase, net monthly benefit = $(5,500 - 800) = $4,700

For Lease, net monthly benefit = $(5,500 - 3,650) = $1,850

NOTE: Net monthly benefit in month 12 for Lease = $(1,850 - 9,000) = - $7,150

(2)

Number of months = 12 x 2 = 24

Monthly interest rate = 12% / 12 = 1% per month

(3)

The option yielding the highest positive NPV should be chosen.

As is seen, Lease option has higher NPV, so the company should choose leasing.

PURCHASE		LEASE
Month	Net Cash Flow ($)	Discount Factor @10%	Discounted Net Cash Flow ($)		Month	Net Cash Flow ($)	Discount Factor @10%	Discounted Net Cash Flow ($)
0	-40,000	1.0000	-40,000		0	-9,000	1.0000	-9,000
1	4,700	0.9091	4,273		1	1,850	0.9091	1,682
2	4,700	0.8264	3,884		2	1,850	0.8264	1,529
3	4,700	0.7513	3,531		3	1,850	0.7513	1,390
4	4,700	0.6830	3,210		4	1,850	0.6830	1,264
5	4,700	0.6209	2,918		5	1,850	0.6209	1,149
6	4,700	0.5645	2,653		6	1,850	0.5645	1,044
7	4,700	0.5132	2,412		7	1,850	0.5132	949
8	4,700	0.4665	2,193		8	1,850	0.4665	863
9	4,700	0.4241	1,993		9	1,850	0.4241	785
10	4,700	0.3855	1,812		10	1,850	0.3855	713
11	4,700	0.3505	1,647		11	1,850	0.3505	648
12	4,700	0.3186	1,498		12	-7,150	0.3186	-2,278
13	4,700	0.2897	1,361		13	1,850	0.2897	536
14	4,700	0.2633	1,238		14	1,850	0.2633	487
15	4,700	0.2394	1,125		15	1,850	0.2394	443
16	4,700	0.2176	1,023		16	1,850	0.2176	403
17	4,700	0.1978	930		17	1,850	0.1978	366
18	4,700	0.1799	845		18	1,850	0.1799	333
19	4,700	0.1635	768		19	1,850	0.1635	302
20	4,700	0.1486	699		20	1,850	0.1486	275
21	4,700	0.1351	635		21	1,850	0.1351	250
22	4,700	0.1228	577		22	1,850	0.1228	227
23	4,700	0.1117	525		23	1,850	0.1117	207
24	4,700	0.1015	477		24	1,850	0.1015	188
		NPV ($) =	2,228				NPV ($) =	4,754