Lease vs. buy with a bank loan
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Stanley Corporation is considering a five year, 6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10 percent and is amortized over five years with end-of-year payments. Stanley can also lease the equipment for an end-of-year payment of 1,790,000. What is the difference in the actual out-of-pocket cash flows between the two payments, that is, by how much (in thousands of dollars) does one payment exceed the other.
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Solution Summary
The solution explains how to calculate the difference in cash flows under lease and buy options.
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We are given the the year end payments for the lease option. It is $1,790,000
We can calculate the year end payments for the loan option. The loan option is to be repaid in 5 years and the interest rate is 10%. The year end payments amount would be such that the present value of the payments would be equal to the loan ...
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