Question

Foster Inc. is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $49,000 to purchase, and maintenance costs would be $5,200 per year. After ten years, Foster estimates it could sell the equipment for $27,000. If Foster leases the equipment, it would pay $13,000 each year, which would include all maintenance costs. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) If the hurdle rate for Foster is 9%, Foster should: (Use appropriate factor from the PV tables. Do not round intermediate calculations. Round your final answer to the nearest hundred.)

lease the equipment, as net present value of cost is about $8,800 less.

lease the equipment, as net present value of cost is about $12,500 less.

buy the equipment, as net present value of cost is about $49,000 less.

buy the equipment, as net present value of cost is about $12,500 less.

Answer 1

Purchase:
	Year(s)	Amount	PV factor	Present value
Cost of Equipment	Now	-49000	1	-49000
Maintenance costs	1-10	-5200	6.4177	-33372
Salvage value	10	27000	0.4224	11405
Total				-70967
Lease:
	Year(s)	Amount	PV factor	Present value
Annual rental	1-10	-13000	6.4177	-83430
Total				-83430
Difference	12463	=83430-70967
Rounded off to $12500
Buy the equipment, as net present value of cost is about $12,500 less.
Option D is correct