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First exam - Assignment Example

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Lease or Purchase Decisions Name/ID# Institution Introduction In order to determine which option is best for the organization in the provision of motor vehicles to use in its operations, it is important to compare the relevant costs for each option. The information in Table 1 in the Appendix indicates that purchasing the vehicles may be the best option…
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First exam

The options available to the organization is to obtain a lease for 36 months with the option to purchase at the end of the lease period, purchasing the motor vehicles by taking out a loan that is repayable over a 36 month (3 year) period or one that is repayable over a 60 month (5 year) period. The 2013 Odyssey LX There are three alternatives available to the organization if it seeks to purchase a 2013 Odyssey LX as one of the vehicles to be used in carrying out the work of the organization. These vehicles will be mainly assessed based on whether to lease or buy and the repayment period to be chosen in the case of the decision to purchase. The difference in total fixed cost is not very different in the case of the 5 year purchase option and the lease option which are $29,110 and $29,548 respectively and this would make the lease option more attractive in present value terms. The 3 year purchase option is approximately $1,250 less than the 5 year purchase option but the time value of money would determine which the better option. However, other considerations when purchasing a vehicle are its fuel economy and the cost of repairs and maintenance. ...
If the total miles to be travelled are well within the 45,000 miles limited then this option may be the best when the present value of money is taken into consideration. Here, an appropriate cost of capital to be used in arriving at the present value of the expenditure over the period would become a further consideration. However, if the motor vehicle is to be purchased by the organization at the end of the lease period approximately half of the total costs to the company of $13,868 would be paid at the end of year 3 and so the present value would be much less than paying the amount over a three year period. Additionally, this option presents the organization with a further option at the end of the lease period to either buy the motor vehicle or lease a new motor vehicle. Therefore, if the organization believes that it is best to get a new vehicle for various reasons including a substantial fall in the value of the vehicle, it would not be saddled with the task of selling the vehicle. One of the drawbacks of this option is that the lessor may specify the type of insurance required and this may place additional and unnecessary burden on the organization. Option 2 – Purchase the Odyssey using a loan repayable over 3 years Purchasing the Odyssey using a loan repayable over 3 years appears to be the lowest cost option based on the information in Table 1. However, this may not be the case if the present value of the expenditure over the 3 year period is considered. As mentioned an appropriate cost of capital would have to be used in determining this. In this case the payments for the motor vehicle are spread evenly over the 3 year period. One advantage of this option is that there will be no further charges for any additional miles travelled over 45,000 as in the ... Read More
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