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Scott
Scott, MIT Graduate
Category: Finance
Satisfied Customers: 17710
Experience:  I manage my own money -- stocks, bonds, 401k, etc.
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My landscaping company can lease a truck for $8000 a year ...

Customer Question

My landscaping company can lease a truck for $8000 a year (paid at year-end) for 6 years. It can instead buy the truck for $40,000. The truck will be valueless after 6 years. If the interes rate my company can earn on its funds are 7%, is it cheaper to buy or lease? Why?
Submitted: 8 years ago.
Category: Finance
Expert:  Scott replied 8 years ago.

Hi there,

Let's figure out the PV of the lease...

PV = FV/(1+r)^t, where PV is the present value, FV is the future value, r is the rate, and t is the time

PV = 8000/(1+0.07)^1 + 8000/(1+0.07)^2 + 8000/(1+0.07)^3 + 8000/(1+0.07)^4 + 8000/(1+0.07)^5 + 8000/(1+0.07)^6

PV = 38132.32

That is lower than the cost of buying the truck outright, so it would be cheaper to lease the truck. Put another way -- the interest you can earn on your money during the lease would more than make up the difference in payments.

Let me know if you have any questions. If not, thanks for pressing "Accept".

-Scott