A diesel generator for electrical power can be purchased by a remote community for $350,000 and used for 10 years, when its salvage value is $50,000. Alternatively, it can be leased for $42,500 a year. (Remember that lease payments occur at the start of the year.) The community’s interest rate is 7%. (a) What is the interest rate for buying versus leasing? Which is the better choice? (b) The community will spend $80,000 less each year for fuel and maintenance, than it currently spends on buying power. Should it obtain the generator? What is the rate of return for the generator using the best financing plan?

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A:

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Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.