You are starting your own hauling/moving business in Miami. The cost of the new truck 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 6 years, you plan to sell the truck and start somewhere else.

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

1. Develop Cash Flow Diagrams for each option.

Please use the following assumptions:

Loan

• You can secure a loan at an interest rate of 8% for 6 years. Use end of period payment.
• The loan requires a down payment on the truck of $5,000.
• 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.
• The market value of the purchased equipment at the end of: the first year, $50,000; 2nd year, $46,000; 3^rd year, $43,000; 4th year, $40,000; 5th year, $37,000; 6th year, $34,000.

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.