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Equipment is being leased from a dealer for $500,000 per year with beginning of year payments...

Equipment is being leased from a dealer for $500,000 per year with beginning of year payments and the lease expires three years from now. It is estimated that a new lease for the succeeding four years on similar new equipment will provide the same service and will cost $750,000 per year with beginning of year payments. The first payment under the new lease occurs at the beginning of year four. The equipment manufacturer is offering to terminate the present lease today and to sell the lessee new equipment for $2 million now which together with a major repair cost of $600,000 at the end of year four should provide the needed equipment service for a total of seven years, after which, the salvage value is estimated to be zero. Use present worth cost analysis for a minimum rate of return of 20% to determine if leasing or purchasing is economically the best approach to provide the equipment service for the next seven years. Verify your conclusion with ROR and NPV analysis, respectively. Please work this problem through excel or explain how you would come to the conclusion using excel.

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Answer #1

Rate Year Lease Purchase Differencial Cash Flows 500,000 -2,000,000 500,000 500,000 750,000 750,000 750,000 750,000 0 0 0 600
Rate 0.2 4 Year Lease Purchase Differencial Cash Flows D5-C5 D6-C6 D7-C7 D8-C8 D9-C9 D10-C10 D11-C11 0 0 4 10 0 NPV C5+NPV(SC

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