Question

Frank Inc. is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $46,000 to purchase, and maintenance costs would be $5,800 per year. After ten years, Frank estimates it could sell the equipment for $21,000. If Frank leased the equipment, it would pay a set annual fee that would include all maintenance costs. Frank has determined after a net present value analysis that at its hurdie rate of 9%, it would be better off by $21,900 if it buys the equipment. What would the approximate annual cost be if Frank were to lease the equipment? (Future Value of $1. Present Value of 51. Future Value Annuity of $1. Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.) Multiple Choice Oo oo $10,000

Answer 1

Facts : Equipment Initial Cost Annual Maintenance Cost Salvage Value Life $ $ $ -46,000 -5,800 21,000 10 Years Calculation of Total Cost of Aternative of buying Equipment : Net Present Value : Equipment Initial Cost $ 46,000 Maintenance Cost $ 37,222 Salvage Value -8,871 Total Cost of buying the Equipment $ 74,352 Calculation of Total Cost of Aternative of Leasing Equipment: The Total Cost of Leasing Equipment is more by $ 21,900 than the Total Cost of buying the Equipment. To determine the Annual Lease Cost, the total shall be divided by the Present Value Annual Factor for 10 Years at 9%. Particulars Total Cost of buying the Equipment 74,352 Add : Extra Cost of Leasing Alternative $ 21,900 Total Cost of Aternative of Leasing Equipment $ 96,252 PVAF for 10 Years @ 9% Hurdle Rate 6.4177 Annual Lease Cost $ 14,998 Answer is Option - A ($ 15,000)