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The Least Cost Decision for Purchasing Cars

A small sales company is committed to supplying three sales representatives with new cars. The company has two alternatives. It can either buy the three cars and sell them after two years, or it can lease the cars for two years. The company uses a 16% discount rate. The information for each alternative is as follows:

Alternative 1: Buy

cost 36,000
annual service costs 3,000
anticipated repairs during the first year 700
anticipated repairs during the second year 1500
salvage value at the end of the 2 years 10,000

Alternative 2: lease

to lease the cars the company would simply pay 20,000 a year for two years

Assuming the lease is paid at the end of each year determine the alternative.

what I did was take 20,000 at 2 years 16% discount rate . Looked at the annuity chart and 16% and 16% factor for the first year .8621 and the second is 1.6052

20,000 x .8621=17242
20,000 x 1.6052=32,104

then for alternative one took

3000 x 1.6052( 16 % at 2 years)=4815.60

took that number and added the 36000= 40,815.6

took the 40,815.6

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Solution Summary

The solution is in excel while the word document offers a full explanation of the steps needed to compare two alternatives: Buy and Lease.