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Close Window Save and Submit & Click Submit to compiete this assessment Question 15 of 1 Question 15 10 points Save Answer Master Manufacturing is considering the purchase of a machine for $500,000. Ahternatively, the machine could be leased on a five-year contract for $125,000 per year with lease year. If the company purchases the machine, maintenance costs willbe $25,000 per year and the salvage value of the machine after five years is expected to be $70,000 Answer the below, questions using an interest rate of 10% per year. Match the closest corect anseers for the below quest one Present Worth of Buy -Present Worth of Lease B. 1S-551.312 Which option they should take: Buy or Lease ? C. 15-473.236] D. Leasel E. IS-94.775 F. I$-521.250 ái Click Submit to complete this assessment. Question 15 of 15 Close Window Save and Submit

Answer 1

Answer A)

Present Worth of Buy

Initial Cost = -$500,000

Maintenance Cost= -$25000 per year for 5 years, hence PV = P * (1- (1+r)^-n) / r , P= -$25000, r = 10%, n= 5 years

Hence PV = -25000 * (1-(1+10%)^-5 /10%

= -25000 * (1-(1.1)^-5 /0.1

= -25000 * (1-0.6209) /0.1

= -25000 * 0.3791/0.1

PV of Maintenance cost= -$94769.67

Salvage Value = $70000, PV = P/1+r)^n, P= $70000, n=5, r=10%

= 70000/(1+10%)^5

=70000/1.1^5

=70000/1.6105

= $43464.49

Hence NPV of Project = Initial Cost + Maintenance cost + Savage Value

= -500000-94769.67+43464.49

NPV =-$551305.18

Hence option B is correct

Answer B)

Present Worth of Lease

Lease cost is $125000 for 5 years (since first payment is made at beginning, present worth needs to be calculated for 4 years.

hence PV = P * (1- (1+r)^-n) / r , P=- $125000, r = 10%, n= 4 years

Hence PV = -125000 * (1-(1+10%)^-4 /10%

= -125000 * (1-(1.1)^-4 /0.1

= -125000 * (1-0.683) /0.1

= -125000 * 0.317/0.1

PV of Lease for 4 years= -$396233.18

Total PV for lease = -125000 - 396233.18 = -$521233.18

Hence option F is the correct answer

Answer c

Since Net Present Worth of Lease is higher, Lease shall be chosen i.e option D