Homework Answers
Purchase price of drilling rig = $500,000
Lease cost of 1 year = $125,000
Maintenance cost per year = $25,000
Salvage value after 5 year = $70,000
MARR = 10%
Present worth of buy = - (Purchase price of drilling rig + Present worth of annual maintenance cost - Present value of salvage)
Purchase price of drilling rig = 500,000
Present worth of annual maintenance cost of each year is calculated as [Annual maintenance cost / (1 + MARR)^Year]
| Year | Annual Maintenance cost | Present worth |
| 1 | 25,000.0 | 22,727.3 |
| 2 | 25,000.0 | 20,661.2 |
| 3 | 25,000.0 | 18,782.9 |
| 4 | 25,000.0 | 17,075.3 |
| 5 | 25,000.0 | 15,523.0 |
| 94,769.7 |
Present value of salvage is calculated as: [Salvage Amount / (1 + MARR)^5] = [70,000 / (1 + 0.1)^5] = 43,464.49
Present worth of buy = -(500,000 + 94,769.7 - 43,464.49) = -551,305.18
Option E is correct.
Present worth of lease = - Present value of annual lease amount
Present value of annual lease amount is calculated as [Annual lease / (1 + MARR)^Year]
| Year | Annual Maintenance Cost | Present worth |
| 0 | 125,000.0 | 125,000.0 |
| 1 | 125,000.0 | 113,636.4 |
| 2 | 125,000.0 | 103,305.8 |
| 3 | 125,000.0 | 93,914.4 |
| 4 | 125,000.0 | 85,376.7 |
| 521,233.2 |
Present worth of lease = -521,233.2
Option C is correct.
As present worth of lease is less than purchase price, machine should be taken on lease. Option D is correct.
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