Question

Question 15 Master Manufacturing is considering the purchase of a machine or $500,000. Aernalively, the machine could be leased on a five-year contract for $125,000 par year with lease maintenance costs wil be $25,000 per year and the salvage value of the machine after flive years is expected to be $70,000 beginning of each yoar. It the compary purchases the machine, Answer the below questions Using an interest rate of 10% pir year Match the dosest corectansen Int beon gostos Procent Worth of Buy : Present Worth of Lease B. IS-551,312 Which option they should take Buy or Lease ? C. (S-473,236 D. Leasel 15-94,778 1S-621,260

Answer 1

ANs 1)

PW of Buy=PW of Salvage Value-Initial Cost-PW of Maitenance Cost

=-500000+70000(P/F,10%,5)-25000(P/A,10%,5)

=-500000+70000(0.6209)-25000(3.791)

=-551312

PW of Buy option =-$551312

Option B is correct

Ans 2)

Present Worth of Lease =-125000(1+(1/1.1^1)+(1/1.1^2)+(1/1.1^3)+(1/1.1^4))

=-125000*4.1698

=-521233.18

Option F is nearby and correct

ANs 3)

PW of LEase option is greater than PW of Buyn option

Therefore Lease option to be selected

Option D is correct answer