Question: A firm can lease office furniture for 5 years for $20,000 per year, or it can purchase the furniture for $80,000 outright. Which is a better choice if the firm can invest its money at 10% an...
Question: A firm can lease office furniture for 5 years for $20,000 per year, or it can purchase the furniture for $80,000 outright. Which is a better choice if the firm can invest its money at 10% annual interest rate? (Assume the furniture will have no remaining value at the end of the 5 years.)
Options:
A: The company would need $62,092 to lease the furniture; they should lease.
B: The company would need $71,632 to lease the furniture; they should lease.
C: The company would need $75,816 to lease the furniture; they should lease.
D: The company would need $100,000 to lease the furniture; they should buy.
Homework Answers
PV of lease = PV of annuity = Annuity*(1-1/(1+rate)^number of terms)/rate
= 20000*(1-1/1.10^5)/0.10
= $ 75815.74
This amount is lower than the outright purchase amount.
Hence option c holds true.
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