management 3 quantitative methods the time value of money a practical conclusion
TRANSCRIPT
Five Fundamental Practical Problems
1. Do I make “this” Investment today, i.e. does it offer a good return?
2. “When” do I take my Pension?
3. “What” will my payments be on this Loan 4. “When and how much” do I need to save
for something – a house, a car, or my retirement?
5. Should I Lease or Buy this
equipment?
#5 Should I Lease or Buy the equipment?
If you “buy” you pay the full purchase price
now, i.e “PV” and you own the equipment
including all the rights that go with that.
If you “lease” you make a modest down-
payment followed by regular lease
payments for a few years, then you return
the equipment (because you don’t own it).
The Decision
Based on analysis.
Analysis is a systematic comparison of
two, or more, alternatives. For us
this means “cost”, the least cost.
Systematic means on the same basis.
For us the basis is present value.
Lease versus Buy?
The Lease Terms are $ 5,000 down and
$ 400 per month for 36 months.
Purchase: $35,000.
Resale?
Estimated to be $22,000 in 3 years.
The Present Value of Leasing
Down-payment + PV(payments)
$ 5,000 + PV($ 400, 36, 7% /12)
$ 5,000 + $ 400 x [[1-(1.005833) -
36] /0.005833 ]
The Present Value of Leasing
Down-payment + PV(payments)
$ 5,000 + PV(A=$ 400, 36, 7% /12)
$ 5,000 + $ 400 x [[1-(1.005833) -
36] /0.005833 ]
$ 5,000 + $ 400 x (1- 0.811079) /
0.005833
The Present Value of Leasing
Down-payment + PV(payments)
$ 5,000 + PV(=$ 400 , 36, 7% /12)
$ 5,000 + $ 400 x [[1-(1.005833) -36]
/0.005833 ]
$ 5,000 + $ 400 x (1- 0.811079) /
0.005833
$ 5,000 + $ 400 x (1 - 0.18921) /
0.005833
The Present Value of Leasing
Down-payment + PV(payments)
$ 5,000 + PV(A= $ 400, 36, 7% /12)
$ 5,000 + $ 400 x [[1-(1.005833) -36]
/0.005833 ]
$ 5,000 + $ 400 x (1- 0.811079) / 0.005833
$ 5,000 + $ 400 x (1 - 0.18921) / 0.005833
$ 5,000 + $ 400 x 32.38
$ 5,000 + $ 12,955
$ 17,955
The Present Value of Purchasing
Purchase price less PV(Resale value)
$ 35,000 - PV($ 22,000, 36, 7% /12)
The Present Value of Purchasing
Purchase price less PV(Resale value)
$ 35,000 - PV($ 22,000, 36, 7% /12)
$ 35,000 - $ 22,000 x (1.005833) -36
The Present Value of Purchasing
Purchase price less PV(Resale value)
$ 35,000 - PV($ 22,000, 36, 7% /12)
$ 35,000 - $ 22,000 x (1.005833) -36
$ 35,000 - $ 22,000 x 0.811079
The Present Value of Purchasing
Purchase price less PV(Resale value)
$ 35,000 - PV($ 22,000, 36, 7% /12)
$ 35,000 - $ 22,000 x (1.005833) -36
$ 35,000 - $ 22,000 x 0.811079
$ 35,000 - $ 17,844
$ 17,156