A firm needs new copy machine. You can purchase a new one for $30000, or you...

A firm needs new copy machine. You can purchase a new one for $30000, or you can lease one for three years for a monthly lease payment of $800 (paid at the end of each month). You can borrow money at 5% APR with quarterly compounding. Do you prefer to lease or buy the machine?

Expert Solution

To decide whether to purchase or lease, we need to compare the monthly lease payment with monthly loan payment for purchasing the machine;over three years. First we need to find monthly rate for borrowing.

Purchase price of machine = Loan = $30000,

Monthly lease payment = $800, , Interest rate = APR = 8% with quarterly compounding

Quarterly rate = APR / no of quarters in a year = 8%/4 = 2% per quarter

Effective annual rate = [1+quarterly rate]^{no of quarters in
a year} - 1 = [1+2%]⁴ - 1 = (1.02)⁴ - 1 = 1.08243216 - 1 = 0.08243216 = 8.243216%

Monthly rate = [1+Effective annual rate]^1/12 - 1 = [1+ 8.243216%]^1/12 - 1 = [1.08243216]^1/12 - 1 = 1.00662270 - 1 = 0.00662270 = 0.662270%

Now we can find the monthly loan payment for purchasing the machine using PMT function in excel

Formula to be used in excel: =PMT(rate,nper,-pv)

Using PMT function in excel, we get Monthly payment of loan of purchasing = 939.36

Since monthly payment of loan for purchasing is greater than monthly lease payment, hence one should lease the machine.

Answer: Lease the machine

jeff jeffy answered 9 months ago

An agricultural accounting firm needs a new copy machine. If it leases the copier on a...

An agricultural accounting firm needs a new copy machine. If it leases the copier on a five year lease, five rental payments of $900 will be made at the end of the year, including the first. Alternatively, the firm could purchase the copier. If purchased, an initial investment of $500 would be required. Amortized loan payments of $500 would then be made at the end of years 1-5. The copier would have no salvage value at the end of five...

MARC Printing Ltd. is considering the purchase of a new copy machine. The machine will cost...

MARC Printing Ltd. is considering the purchase of a new copy machine. The machine will cost $90,000 plus $6,000 for shipping and $4,000 for installation. The machine’s useful life is four years and falls under the straight line depreciation (with no salvage value). Operating of this printing machine requires additional inventories of $32.000. On the other hand, $12.000 of the inventories will be on account and receivable of the project. Will be $5.000. MARC Ltd. forecasts that new machine will...

A firm is considering the purchase of a new machine at a price of $108,000. The machine...

A firm is considering the purchase of a new machine at a price of $108,000. The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $15,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $5,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...

A firm is considering the purchase of a new machine at a price of $150,000. The machine...

A firm is considering the purchase of a new machine at a price of $150,000. The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $10,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $16,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...

A firm is considering the purchase of a new machine at a price of $120,000. The machine...

A firm is considering the purchase of a new machine at a price of $120,000. The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $15,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $5,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...

A firm is considering the purchase of a new machine at a price of $200,000. The machine...

A firm is considering the purchase of a new machine at a price of $200,000. The machine falls into the three-year MACRS class. If the new machine is acquired, the firm's investment in net working capital will immediately increase by $20,000 and then remain at that level throughout the life of the project. At the end of 3 years, the new machine can be sold for $40,000. Earnings before depreciation, interest and taxes (EBDIT) are expected to be as follows with...

Zeus Products needs to purchase a new machine. The machine costs $27,000 and will reduce operating...

Zeus Products needs to purchase a new machine. The machine costs $27,000 and will reduce operating costs by $3,500 per year. The company is able to sell their old machine for $4,500. What is the payback period in years? Enter the value with 2 decimals. Answer:___________ A company is deciding if they want to invest $90,000 in a machine that will result in a cost reduction of $20,000 in each of 8 years. The company can earn a rate of...

Cheetah Copy purchased a new copy machine. The new machine cost $110,000 including installation. The company...

Cheetah Copy purchased a new copy machine. The new machine cost $110,000 including installation. The company estimates the equipment will have a residual value of $27,500. Cheetah Copy also estimates it will use the machine for four years or about 8,000 total hours. Actual use per year was as follows: Year Hours Used 1 2,000 2 1,600 3 2,000 4 3,200 1. Prepare a depreciation schedule for four years using the straight-line method. (Do not round your intermediate calculations.) 2....

Cheetah Copy purchased a new copy machine. The new machine cost $136,000 including installation. The company...

Cheetah Copy purchased a new copy machine. The new machine cost $136,000 including installation. The company estimates the equipment will have a residual value of $34,000. Cheetah Copy also estimates it will use the machine for four years or about 8,000 total hours. Actual use per year was as follows: Year Hours Used 1 2,900 2 1,900 3 1,900 4 3,500 2. Prepare a depreciation schedule for four years using the double-declining-balance method. CHEETAH COPY Depreciation Schedule—Double-Declining-Balance End of Year...

Cheetah Copy purchased a new copy machine. The new machine cost $114,000 including installation. The company...

Cheetah Copy purchased a new copy machine. The new machine cost $114,000 including installation. The company estimates the equipment will have a residual value of $28,500. Cheetah Copy also estimates it will use the machine for four years or about 8,000 total hours. Actual use per year was as follows: Year Hours Used 1 2,000 2 2,000 3 2,000 4 3,200 2. Prepare a depreciation schedule for four years using the double-declining-balance method. (Hint: The asset will be depreciated in...

Question