Question

Purchase $320.000 Lease Alternative Initial Cost Lease Annual Operating costs Salvage Value Life, years $40 000 $7.000 $8500 $ 80.000 5 5 c. PW of Purchase Option a. PW of the lease Option 0. Salvage value of purchase Option Decision to Purchase or Lease 567.942 9-193,337 C5-309 5515 5-49,072 5-319.327 * Lease

Answer 1

D E F 1 B Purchase $320,000 Lease $40,000 $7,000 Alternative 2 Initial Cost 3 Lease 4 Annual Operating costs 5 Salvage Value 6 Life, years 7 8 PW of the Purchase Option $8,500 $80,000 5 5 9 10 Present Value of Initial Cost 11 Present Value of Annual op.costs 12 Present Value of Salvage Value 13 PW of the Purchase Option $320,000.00 =B2 $32,221.69 =B4*((1-(1+0.1)^-B6)/0.1) $49,673.71 =B5/1.145 $302,547.98 =B10+B11-B12 14 15 1-(1+r)- Present Value of Annuity = CF 16 1 17 18 PW of the Lease Option 19 20 Present Value of Lease Payments $166,794.62 =C3+(C3*((1-(1+0.1)^-4)/0.1)) 21 Present Value of Annual op.costs $26,535.51 =C4*((1-(1+0.1)^-B6)/0.1) 22 PW of the Lease Option $193,330.13 =SUM(B20:B21) 23 24 Salvage Value of the purchase Option $49,673.71 =B12 25 26 Decision to Purchase or Lease Lease 27 28 Note: The Differences in the value is due to the rounding off differences. It is not a big deal 29

Note: The slight differences in the value is due to rouding off differences. It should not be taken into cosideration. Select the option closest to the value.

D F А B с E 31 Cost item Machine A Machine B 32 First Cost $50,000 130,000 33 Annual Maintenance Cost $11,000 $2,500 34 Periodic Maintenance cost every 8 years $45,000 35 Salvage Value $6,000 36 Life, years 5 37 38 Capitalized cost of the annual maintenance cost $25,000 =C33/0.1 39 of Machine B 40 41 Capitalized Cost of the periodic maintenance cost every 8 years of Machine B 42 Interest rate (i) 10.000% 43 Effective Interest rate 8 years 114.359% =(1+B42)^8-1 44 45 Periodic Maintenance cost every 8 years $45,000 =C34 46 Capitalized Cost $39,350 =B45/B43 47 48 Total Capitalized cost of Machine B 49 Capitalized cost of First Cost $130,000 -C32 50 Capitalized cost of Annual Maintenance cost $25,000 =B38 51 Capitalized cost of Periodic Maintenance cost $39,350 =B46 52 Total Capitalized cost of Machine B $194,350 =SUM(B49:351) 53 54 Total Capitalized cost of Machine A 55 Capitalized cost of First Cost $50,000 =B32 56 Capitalized cost of Annual Maintenance cost $41,699 =B33*((1-(1+0.1)^-5)/0.1) 57 Capitalized cost of Salvage value $3,726 =B35/(1+0.1)45 58 Total Capitalized Cost of Machine A $87,973 =B55+B56-B57 59 60 1-(1+r)- Present Value of Annuity = CF 61 62 63 Which Machine you have to select Machine A 64 65 Based on Capitalized Cost, Machine A will be selected, But if it were based on Equivalent 66 Annual Costs, Machine B might have been the better choice. It is not asked to calculated

Note: In the image given, some of the options are missing. Select the amount closest to the option. The slight differences will be due to rounding off differences.