Question

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 comma 500$10,500

per year if you sign a guaranteed

55​-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

55

​years). If your discount rate is

6.7 %6.7%​,

what should you​ do?

Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
negative $ 40 comma 800−$40,800	negative $ 2 comma 000−$2,000	negative $ 2 comma 000−$2,000	negative $ 2 comma 000−$2,000	negative $ 2 comma 000−$2,000	negative $ 2 comma 000−$2,000

The net present value of the leasing alternative is

​$nothing.

​(Round to the nearest​ dollar.)

Answer 1

Leasing Step 1 Lease payments = $10,500p.a Step 2 PV of cash outflow Disc. Cash Lease Year PV @ 6.7% outflow payments 0.9372 9,840.60 1 10,500 10,500 0.8784 9,223.20 2 10,500 0.8232 8,643.60 0.7715 8,100.75 10,500 10,500 0.7231 7,592.55 PV of cash outflow 43,401 Buying PV of cash outflow Disc. Cash PV @6.7% cash outflows Year outflow 1 40,800.00 0 40,800 2,000 0.9372 1 1,874.40 2,000 2 0.8784 1,756.80 2,000 0.8232 1,646.40 4 2,000 0.7715 1,543.00 0.7231 2,000 1,446.20 PV of cash outflow 49,067 PV of cash outflows under Leasing alternative is $43,401 PV of cash outflows under Buying alternative is $49,067 Since, cash outflow under Leasing alternative is less, it should be selected. Therefore, the equipment shall be leased.