Question

You have to buy a new copier. The cost of the copier is $2,050, plus $385 per year in maintenance costs. The copier will last for five years. Alternatively, a local company offers to lease the copier to you and do the maintenance as well. If your discount rate is 5.7%, what is the most you would be willing to pay per year to lease the copier (your first lease payment is due in one year)? (Select the best choice below.) O A. The most you would be willing to pay per year to lease the copier is $3,685.08. B. The most you would be willing to pay per year to lease the copier is $2,050. OC. The most you would be willing to pay per year to lease the copier is $385. D. The most you would be willing to pay per year to lease the copier is $867.70.

Answer 1

Maximum lease amount per year is the equivalent annual cost (EAC) of purchase option.

EAC if purchased= $867.70 as follows:

r= A B С D 1 Equivalent Annual Cost (EAC) 2 Given, 3 Asset Price AP $ 2,050 4 Annual Maint Cost AMC $ 385 5 Discount rate 5.7% 6 No. of years t= 5 7 EAC= (Asset Price/Annuity Factor)+ Annual Maintenance Cost 8 Annuity Factor (AF)= {1-[1/(1+r)^t}/r 9 Formula Cell reference Value 10 1+r= 1+D5 1.057 11 (1+r)^t= D10^D6 1.319395312 12 1/(1+r)^t 1/D11 0.75792296 13 1-{1/(1+r)^t} 1-D12 0.24207704 14 Annuity Factor 1-{1/(1+r)^t}/r D13/D5 4.246965615 15 EAC (AP/AF)+AMC (D3/D14)+D4 $ 867.70

Hence the answer is option D: $867.70