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blsea [12.9K]
3 years ago
7

Buy machine. The machine could be purchased for $169,000 in cash. All maintenance and insurance costs, which approximate $14,000

per year, would be paid by Kiddy. 2.Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $34,000 with the first payment due immediately. All maintenance and insurance costs will be paid for by the Lollie Corp. and the machine will revert back to Lollie at the end of the 10-year period. Required Assuming that a 8% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, find the present value for the following options. Ignore income tax considerations. Determine which option Kiddy should choose.
Business
1 answer:
Hitman42 [59]3 years ago
3 0

Answer:

It is better to use the lease opton as the present worth is lower.

Explanation:

Present value of the lease liability/equipment cost:

C \times \frac{1-(1+r)^{-time} }{rate}(1+r) = PV\\

C -34,000.00

time 10 years

rate    0.08

-34000 \times \frac{1-(1+0.08)^{-10} }{0.08}(1+0.08) = PV\\

PV -$246,394.1890

Purchase option 169,000 cash + PV of maintenance  and insurance

C \times \frac{1-(1+r)^{-time} }{rate} = PV\\

C -14,000.00

time 10

rate      0.08

14000 \times \frac{1-(1+0.08)^{-10} }{0.08} = PV\\

PV -$93,941.1396

-169,000  -93,941.14 = -262.941,14‬

As the cost for the lease is lower than the purchase option it is better for the firm to use the lease option.

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<em>The complete question reads;</em>

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