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Your company owns a truck which is no longer being used. Since this depreciating asset...

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Finance

Your company owns a truck which is no longer being used. Since this depreciating asset is not generating any income, you would like to either sell it, or lease it. The current value of the truck is $70,000.

If you sell the truck, you receive 100% of the trucks value today.

If you lease the truck to your friends company, you pay a $1,000 fee today to set up the lease. The monthly lease you receive is $1,000. You pay for the 12-monthly $1,000 maintenance, which is due in months 12, 24, 36, 48, and 60. At the end of 5 years, the truck is returned to you. At this point, you know you will sell the truck for its residual value, $25,000. You have access to an investment product that yields 3% per annum. In the sell scenario you receive payment at the end of the next period . The first lease payment also occurs at the end of the next period

(b) Due to changing inflation expectations you are unsure about the residual value of your truck. Keeping all other model parameters constant, which residual value makes you indifferent between selling and leasing? In other words, which residual value corresponds to a $0 difference between selling and leasing? Document your steps carefully.

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