Question

You have to buy a new copier. The cost of the copier is $2,000​, plus $ 400 per year in maintenance costs. The copier will last for five years. Alternatively a local company offers to lease the copier to you and do the maintenance as well. If your discount rate is 6 %​, what is the most you would be willing to pay per year to lease the copier​ (your first lease payment is due in one​ year)?

​(Select the best choice​ below.)

A. The most you would be willing to pay per year to lease the copier is $ 3,684.95.

B. The most you would be willing to pay per year to lease the copier is $ 874.79.

C. The most you would be willing to pay per year to lease the copier is $ 400.

D. The most you would be willing to pay per year to lease the copier is $ 2,000.

Answer 1

Solution:
	Answer is B. The most you would be willing to pay per year to lease the copier is $ 874.79
Working Notes:
	The most willing to pay per year to lease the copier is Equivalent annual cost of the new copier cost under purchase and maintenance arrangement.
	Equivalent annual cost of the new copier cost under purchase and maintenance arrangement.
	Equivalent annual cost EAC of new copier
	= (cost/(PVIFA discount rate%,life)) + annual maintainance cost
	= (2000/(PVIFA 6%,5)) + $400
	= (2000/4.21236379) + $400
	= 474.7928004 + $400
	= 874.7928004
	874.79
Notes:	We would be willing to pay per year to lease the copier is the Equivalent annual cost EAC of new copier under purchase arrangement which is above calculated is $874.79
Notes:	PVIFA 6%,5   is 6% for 1 to 5th is calculated
	= (1 - (1/(1 + r%)^n) ) /r%
	= (1 - (1/(1 + 6%)^5) ) /6%
	4.21236379
	=4.21236379
Please feel free to ask if anything about above solution in comment section of the question.