Question

Question Three Your project management outfit is trying to decide whether to lease or buy equipment which would be used for production for a duration of 10years. The monthly lease cost is 500ghe. To purchase the item, the investment cost is 50,000 ghc and the monthly maintenance cost is 100ghe. The useful life of the equipment is 10years, and the salvage value is 2,550ghc. A. How long will it take for the lease cost to be the same as the purchase cost? B. Will you advise your organisation to lease the equipment or to purchase it? Justify your answer. C. What will be the difference in cost, between procuring the equipment and leasing it for the production

Answer 1

Given information:-

The total duration of production = 10 years

Monthly lease cost = 500 ghc

The investment cost for purchasing the machine = 50,000 ghc

Monthly maintenance cost = 100 ghc

The useful life of the equipment = 10 years

Salvage value =2550 ghc

Total purchasing cost in 10 years = 50,000 + ( Monthly maintenance cost *12*10) - salvage value

Therefore Total purchasing cost in 10 years = 50,000 + 12000 - 2550 = 59,450 ghc

AND

Lease cost of the machine in 10 years = 500 * 12 * 10 = 60,000

(1) Time taken for lease cost to be equal to purchase cost = 59450/60000 = 0.99 years = 0.99*12=11.89 months

(2) Since purchasing cost is lesser than lease cost, therefore I would suggest purchasing

(3) Differnce between lease cost and purchasing cost in 10 years = 60,000 - 59,450 = 550 ghc