Your landscaping company can lease a truck for $7,300 a year (paid at year-end) for 5 years. it can instead buy the truck for $32,000. the truck will be valueless after 5 years. the interest rate your company can earn on its funds is 6%.

In this question I assume we are asked whether its better for the firm to pay 32,000 now or 7,300 yearly, if the interest rate is 6%.

The present value of 5 yearly payments of 7,300 when discounted by 6% is 30750.26 which is less than 32,000 which means that our company should lease the truck as leasing is cheaper.

Explanation:

In this question I assume we are asked whether its better for the firm to pay 32,000 now or 7,300 yearly, if the interest rate is 6%. In this question we have to find out the present value of 7,300 yearly for 5 years and discount is by 6% in order to find out whether the present value of yearly payments is less than or more than 32,000.

7,300/1.06 +

7,300/1.06^2+

7,300/1.06^3+

7,300/1.06^4+

7,300/1.06^5

=30750.26

The present value of 5 yearly payments of 7,300 when discounted by 6% is 30750.26 which is less than 32,000 which means that our company should lease the truck as leasing is cheaper.

correct, but each time you dont pay the price of the penalty can increase.