You are starting your own hauling/moving business in Miami. The cost of the new truck with is $55,000. If you buy it, you will have to get a loan from the bank. However, there is an option to lease the equipment. In 7 years, you plan to sell the truck and start somewhere else.

You need to make a decision to purchase the equipment or lease it. Here are the questions you need to answer:

1. Prepare a table with the pros and cons for a purchase or a lease. List the top five pros and cons for each option.
2. Prepare a table that shows the annual net costs and the NPV of cost.
3. Which is the best option to choose? Please explain why.

Please use the following assumptions:

Loan

• You can secure a loan at an interest rate of 8% for 7 years. Use end of period payment.
• The loan requires a down payment on the truck of $5,000.

Lease

• The front-end charge on a 3-year lease is $3,000.
• The lease rate for the same truck is $7,500 per year for 3 years.
• The truck lease renews after three years, with a new truck included and for the same Lease terms (including the $3,000 front-end).
• A $1,000 lease penalty fee charged at the end of each 3-year leasing period.

Other information

• First year repair expense is $1,000; 2nd year, $1,500; 3rd year, $2,500; 4th year, $3,000; 5th year, $3,500; 6th year, $4,000; 7th year, $4,500.
• The truck is depreciated using $8570/year for income tax purposes.
• The market value of the purchased equipment at the end of: the first year, $50,000; 2nd year, $46,000; 3^rdyear, $43,000; 4th year, $40,000; 5th year, $37,000; 6th year, $34,000; 7th year, $31,000.
• The Income tax rate is 28%.
• Discount rate for calculating net present value (NPV) of the annual cost is 8%.