Present value analysis – buy or lease a truck?

Speedy Trucking is trying to decide whether it should buy a new truck for its business or lease the truck from another company. If Speedy decides to buy the truck, it must pay $140 000 cash immediately, and the truck is expected to last for five years. At the end of the five years, the truck will have no remaining value and will be disposed of. If Speedy decides to lease the truck, it must pay $30 000 at the end of each year for five years, at which point the truck must be returned to the leasing company. Assume zero taxes.

Required:

1 If the current market interest rate (which Speedy has to pay to borrow the money) is 10 per cent, should Speedy lease or buy the truck?

2 Suppose Speedy discovers that, if the truck were bought, it could be sold at the end of the five years for

$35 000. Would your answer to part 1 change?

3 Identify two important assumptions made in your analyses and explain why those assumptions are important.