A rental company is considering the purchase of new trailers to least to customers. Each trailer will cost $20,000 today. Each trailer will bring $10,000.00 in an annual lease for 5 years. The lease is paid at the end of each year. At the end of the 5 years the trailer will have no depreciated or salvage value. The interest to be paid for this investment is 9%. Use this information to complete this table. Would you advise the firm to make this investment at 9%? Why? Fill out the Table:

Year Future Value Present Value Discount Factor
1
2
3
4
5

Answer and Explanation:

The computation is shown below;

Year         Future value        present value      Discount factors

1              $10,000.00           $9,170                   0.917

2              $10,000.00          $8,410                  0.841

3               $10,000.00         $7,720                 0.772

4               $10,000.00         $7,080                 0.708

5               $10,000.00         $6,490                0.649

Now

Net present value = -$20,000 + $10,000(PVIFA 9% 5 Years)

= -$20,000 + $10000 × (3.8897)

= -$20,000+ $38,897

 = $18,897

So here the investment should be make as the net present value comes in positive  

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