Leopardstown Fitness Centre in Dublin is considering the purchase of some new training equipment which has a retail price of €8,600. The club has only €600 available to fund the purchase at this time. Following discussions with its local bank, as well as a sales representative from the suppliers, the centre is faced with the following possibilities. Rental: Pay a monthly rental of €140 for five years, plus an annual maintenance payment of €150.

Hire purchase: Pay a deposit of €600, plus 60 monthly instalments of €150.
A final payment of €480 must then be paid.

Bank loan: Borrow the amount needed for five years on which interest is charged at a flat rate of 7% per annum.

Calculate the total cost of each option over a five-year period.

The cost of each option is as below

Explanation:

Option A: Rental

monthly rental for five years: each month €140

Each year has a maintenance fee of €150.

The total of the rental will be monthly rent plus yearly charges.

One year has 12 months; five years will have = 12 x 5 = 60 months

For 60 months, rental payments will total 60 x €140= €8,400

Yearly charges = €140 x 5 = €700

Total for rental = €700 + €8,400

Total cost for rental = €99, 1100

Option B: Hire purchase

Total for hire purchase will be the deposit plus the total of monthly installments plus the final payment.

The deposit is €600

Total for monthly installments: 60 x €160= €9,600

the final payment is €480

Total for hire purchase= €600 + €9,600, + €480

Total cost for hire purchase=€10,680

Option Bank loan:

cost of the loan will be the principal amount plus the interest charged. Interest is 7% per year for five years. Principal amount is

€8,600

Interest = P x r x t,, since interest on a flat rate

=8600 x 7/100 x 5

=8600 x 0.07 x 5

=€3,010

The cost of the loan is €3,010+€8,600

=€11,610

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