A resort needs a piece of machinery to move snow in the winter months for October to
the end of April.
a) Predict whether the company should rent, buy, or lease, based on the costs
described below. Justify your prediction.
•A new tractor costs $18600 and can be financed at 6.6% compounded monthly for 7
•Renting a tractor will cost $60 per day
•Leasing costs are $2000 down and $1345 per month for 7 months
b) Verify your prediction.
c) What are the pros and cons to each option?
to BUY - If the resort waits until the seven months have passed and pay off the debt all at once, it will cost $29,095. Pro: The resort will have the tractor for the next year, and the year after that, and so on until the end of the life of the tractor, call that 10 years. Con: That's a large outlay of money all at once, and the cost of upkeep will add to the total expense over time, but relatively insignificant assuming proper use. It would be prudent to buy insurance for the tractor, and that will add somewhat to the total.
to RENT - It doesn't say, but assuming the tractor musts be rented every day, so that's $60 times about 212 days totals $12,700. Not as much cost up front as buying, but the purchased tractor will last 10 years. If you rent under the same terms every year for 10 years (we're comparing this to buying) the total outlay for rent becomes $127,000. Ouch. Pro: It's less expensive for one year than buying, then you have a whole year to raise the $12,700 for the next year. Also, it belongs to somebody else so they're responsible for the upkeep. Con: It's twelve grand every year; in three years it will have cost more than buying.
to LEASE - Total cost for seven months is $11,415. Pro: Same as renting except about $1,285 less. Con: Same as renting.
Conclusion. As with most things, it's better to buy than to rent or lease, IF you've got the money. Renting or leasing is cheaper to get you going, but it doesn't take very long to have cost more than buying in the first place.