I am trying to do an analysis using NPV to determine whether to buy or lease. First what exactly is the discount rate? Would it be, if I took the money today and invested it, the return I would get?
Here is my buy information (no financing): Purchase price: $198,000 With a shipping cost of: $10,512.14 And a monthly service fee of: $3,306.06 Discount rate of: 2.5% Returns: Year 1 – 2%, Year 2 – 5%, Years 3-6 – 6%
What would my NPV be? I am getting ($281,099.57)
To Lease the information is: Monthly Lease price: $3,860.55 Monthly service fee: $3,306.06 And a shipping cost of: $10,506.45 Same discount rate and Returns
What is this NPV? Here I am getting: ($207,325.75)
I keep getting negative NPV’s If that is correct does that mean, if negative to consider leasing?
And if I take the difference between the Buy and Lease NPV’s less the Purchase price, would that give me a price to consider buying? ($281,099.57)-($207,325.75)= ($73,773.82) $198,000-$73,773.82= $124,226.18 – if this price to consider purchasing?
Also, what is the IRR?
Thank you for your help
Mar 5th 2009, 02:53 PM
Ill-defined, I think.
Return is 6% on what? Is it annual? Monthly?
Is there a compounding methodology on that discount rate?
Is the term only 6 years?
No salvage value?
The one way I invented, totally guessing at all the questions listed above, I managed more like (373,000).
It appears there is some rethinking in your future.
Mar 5th 2009, 06:21 PM
Thank you for responding.
The returns of 2%, year 1; 5% year 2; and 6% for years 3-5 on the purchase price. They are annual returns.
Sorry there is no year 6 - my misprint
For these purposes do not include a salvage value
Mar 6th 2009, 03:49 PM
That's a little better. Now break out your spreadsheet and build it up. Let's see what you get.
Mar 7th 2009, 12:36 PM
For the Purchase option I get: ($38,874.70) and for the Lease: $34,121.13 Purchase Price198,000.00Monthly Lease3,860.55Shipping Cost10,512.14Shipping Cost10,506.45Discount Rate2.50%Discount Rate2.50%Monthly Service Fee3,306.06Monthly Service Fee3,306.06NPV($38,874.70)NPV$34,121.13 MonthRate0-208,512.14-14,367.001653.942%-3206.612653.942%-3206.613653.942%-3206.614653.942%-3206.615653.942%-3206.616653.942%-3206.617653.942%-3206.618653.942%-3206.619653.942%-3206.6110653.942%-3206.6111653.942%-3206.6112653.942%-3206.61136593.945%2733.39146593.945%2733.39156593.945%2733.39
So it makes more sense to Lease.
What would my IRR be?
If both Lease and Purchase were negative. Would it make sense to look at the on that is the least negative or to consider the leasing option?
If I take both NPV's (38,874.70)-34,121.13 = 72,995.83
In order to consider buying, it would have to be less then 125,004.17?