Question

true or false and why

b) Ignoring taxes and other transaction costs, if the actual rent for a machine is currently $8,000, its current price is $100,000 and is expected to rise by 4% a year, the depreciation rate is 3% a year, and the market interest rate is 8% a year, then it pays for a firm to rent rather than buy the machine.

Answer 1

the answer is TRUE

Below are the details

Assuming the useful life of this machine is 10 years

Machine Rent 1st year $8,000

2nd year $8,000*4%=$8,320

3rd Year $8,320*4%=$8,333

4th year $8,333*4%=$8,666

5th year $8,666*4%=$9,013

6th year $9,013*4%=$9,374

7th year $9,374*4%=$9,749

8th year $9,749*4%=$10,139

9th year $10139*4%=$10,545

10th year $10,545*4%=$10,967

so after 5 years you will be paying for the machinery is $8,000+$8,320+$8,333+$8,666+$9,013+$9,374+9,749+$10,139+$10,545+$10,967=$93,106

but while purchasing the Machinery the cost of the machinery right now $100,000 which is higher than the rent assuming for 10 years so Rent will be the best option as per 10 years of Useful life