Question

P 8-31 (similar to) Question Help You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,000 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of 5 years). If your discount rate is 6.6 %, what should you do? Year -$39,400 Year 1 Year 2 Year 3 Year 4 Year 5 -$2,000 - $2,000 -$2,000 -$2,000 -$2,000 The net present value of the leasing alternative is $ (Round to the nearest dollar.)

Answer 1

PV of Cash Outflows under Leasing Option:

Year	CF	PVF @6.6%	Disc CF
0	$               -	1.0000	$               -
1	$ 10,000.00	0.9381	$   9,380.86
2	$ 10,000.00	0.8800	$   8,800.06
3	$ 10,000.00	0.8255	$   8,255.21
4	$ 10,000.00	0.7744	$   7,744.10
5	$ 10,000.00	0.7265	$   7,264.64
PV of Cash Outflows under Leasing			$ 41,444.88

PV of Cash Outflows under Buy Option:

Year	CF	PVF @6.6%	Disc CF
0	$ 39,400.00	1.0000	$ 39,400.00
1	$   2,000.00	0.9381	$   1,876.17
2	$   2,000.00	0.8800	$   1,760.01
3	$   2,000.00	0.8255	$   1,651.04
4	$   2,000.00	0.7744	$   1,548.82
5	$   2,000.00	0.7265	$   1,452.93
PV of Cash Outflows under Leasing			$ 47,688.98

NPV of Leasing Alternative = PV of CFs under Buy option - PV of Cash Outflows under Lease option

= $ 47,688.98 - $ 41,444.88

= $ 6,244.10

NPV of Leasing Alternative is $6,244.10