Question

You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10.000 per year if you sign a quaranteed 5-year as the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease Alternatively, you could buy and maintain the equipment yourself The cash flows from doing so are listed below the equipment has an economics of 5 years) If your countrate is 70% what should you do? Year 0 -540 000 Year 1 - 52.000 Year 2 -$2,000 Year 4 $2.000 Year 5 - S2000 -5000 The not present value of the leasing alternative is (Round to the nearest dollar) The net present value of the buying alternative is S (Round to the nearest dollar) What should you do? Select from the drop down menus. The cost ot is less, so you should the equipment

Answer 1

NPV of lease = PV of annuity = Annuity*(1-1/(1+rate)^number of terms)/rate

= -10000*(1-1/1.07^5)/0.07

= -41001.97

NPV of buying= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n

= -40000-2000/1.07^1--2000/1.07^2-2000/1.07^3-2000/1.07^4-2000/1.07^5

=-44706.6

The cost of lease is less, so you should lease the equipment