Your friend Harold is trying to decide whether to buy or lease his next vehicle. He has gathered information about each option but is not sure how to compare the alternatives. Purchasing a new vehicle will cost $26,500, and Harold expects to spend about $500 per year in maintenance costs.
He would keep the vehicle for five years and estimates that the salvage value will be $10,500.
Alternatively, Harold could lease the same vehicle for five years at a cost of $3,480 per year, including maintenance. Assume a discount rate of 10 percent.

1. Calculate the net present value of Harold’s options.
2. Advise Harold about which option he should choose and explain your reasoning.

  • CreatedFebruary 27, 2015
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