Answer:
Kiddy Toy Corporation
The company should lease. It will save $30,123 by leasing than by buying the machine.
Explanation:
a) Data and Calculations:
1. Buy Machine:
Initial cost = $170,000
Annual Insurance Premium = $15,000
Interest rate = 12%
Estimated useful (Lease Period) = 15 years
Insurance Premium for 15 years (PV) = $102,162.97
PV of Salvage value ($20,000 * 0.183) = $3,660
Total cost of buying machine = $268,503 ($170,000 + $102,162.97 - $3,660)
Present value of lease payments = $238,380
NPV of leasing over buying = $30,123 ($268,503 - $238,380)
N (# of periods) 15
I/Y (Interest per year) 12
PMT (Periodic Payment) 35000
FV (Future Value) 0
Results
PV = $238,380.26
Sum of all periodic payments = $525,000.00
Total Interest = $286,619.74
Insurance Premium:
N (# of periods) 15
I/Y (Interest per year) 12
PMT (Periodic Payment) 15000
FV (Future Value) 0
Results
PV = $102,162.97
Sum of all periodic payments $225,000.00
Total Interest $-122,837.03
