Evaluation of purchase option
Cost of new vehicle = $ 31,500
Annual maintenance cost = $ 1,000
Useful life of vehicle = 5 years
Scrap value of vehicle after 5 years = $12,500
Present value of cash outflows = 31,500 + 1,000 (PVAF 11 % , 5 ) – 12,500 (PVF 11 %, 5 )
= 31,500 + 1,000 x 3.696 – 12,500 x 0.593
= 31,500 + 3696 – 7,412.5
= $ 27,784
Evaluation of lease option
Annual lease = $4,095
Lease tenure = 5 years
Present value of cash outflows = 4,095 + 4,095 x (PVAF 11 % , 4 )
= 4,095 + 4,095 x 3.102
= 4,095 + 12,702.69
= $ 16,798
Purchase option – $ 27,784
Lease option – $ 16,798
Since the present value of cash outflows is lower in case of lease option, hence it is economical to acquire new vehicles on lease.
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