Answer:
The machine should be leased because it is cheaper when compared to buying the machine.
Explanation:
To determine which option kiddy should choose , we are to calculate the net present value of buying the machine and the present value of payments thay kiddy would make if they lease the equipment.
Net present value is the present value of after tax cash flows from an investment less the amount invested.
NPV can be calculated using a financial calculator:
Cash flow in year 0 = $-161,000
Cash flow each year from year 1 to 11 = $-6,000
Cash flow in year 12 = $-6,000 + $11,000 = $5,000
I = 11%
NPV = $-196,809.89
Present value of lease payment
Cash flow each year from year 1 to 11 = $-26,000
I = 11%
PV = $-161,369.40
The machine should be leased because it is cheaper when compared to buying the machine.
To find the NPV using a financial calacutor:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
Present value can be calculated using the same steps as above
I hope my answer helps you
