I need some help on this problem below, what is the best way to approach this.

Thanks

Your firm is to deliver 320,000 cubic yards per year both this year and next, and then 185,000 cubic yards per year for the following six years.

TRANSPORT OPTIONS:

You have narrowed your vehicle choice to the Mark Transporter and the Kenwood Hauler, and you are considering both leases and outright purchases of each vehicle.

Mark Transporter T-5

Capacity: 5 cubic yards

Current purchase price: $51,050

Two-year lease option: $1350 per month; last month's lease due at delivery; purchase option at the end of lease for projected fair market retail value of $36,500 (current dollars). Sum of total monthly payments for two-year lease=$32,400. Lessee responsible for all maintenance and upkeep costs.

Estimated operation and maintenance costs: $2300 per year for the first three years; increasing by $300 per year every year thereafter.

Kenwood Hauler H-85

Capacity 8.5 cubic yards

Current purchase price: $73,400

Two-year lease option: $1700 per month; last month's lease due at delivery; purchase option at the end of the lease for projected fair market value of $55,000 (current dollars). Sum of total monthly payments for two-year lease =$40,800. Lessee responsible for all maintenance and upkeep costs.

Estimated Operation and Maintenance Costs: $3000 for the first year; increasing by a real rate of 10% per year every year thereafter.

Purchase/Lease Options:

The prices that you have been quoted are dependent on using each truck exclusively, and you have already considered and eliminated the possibility of combining smaller numbers of the different trucks. Regardless of the truck that you choose, the following three purchase/lease options exist:

Option 1: Purchase all the trucks required for the initial two-year period, sell the trucks not required for the last six years as soon as they are no longer needed, and sell the rest of the trucks when the contract expires.

Option 2: Lease all the trucks required for the initial two-year period, invoke the purchase option at the end of the two years for enough trucks to fulfill your remaining obligations, and sell the trucks that you purchased when the contract expires.

Option 3: Purchase (now) all the trucks that you will need for the last six years of the project, and sell them at the end of the eight year period. Lease any additional trucks that you will need for the first two years.

CONDITIONS:

All cost figures, unless obvious from the context or otherwise identified are in constant 1991 dollars. Contractual agreements, such as leases, are expressed in current dollars unless they specifically contain inflation-linked escalation clauses. The anticipated general inflation rate over the next 10 years is 4.5% per year.

A 7.5% real annual interest rate is used by your firm for discounted cash flow calculations.

The distance between sites and the loading capacity of your excavation equipment will limit each truck to, on average, six round trips per day of operation.

You may estimate the fair market retail value for trucks that are older than two years old by applying a real rate of decline of 10% per year to the fair market retail value of two-year-old trucks. You expect to pay the full retail value of you are purchasing trucks, but expect to receive only 80% of that amount if you are selling trucks.

You maynotapproximate your annual lease payments by simply summing your monthly payments. The requirement to pay your last month's lease at time of delivery does not reduce your total number of lease payments, but does shift the timing of them.

If you choose, at any point, to purchase vehicles, you will pay for them with cash from corporate funds.