Question

Company XYZ wants to acquire a machine for its manufacturing facility, but is unsure whether it should lease or buy. The facts are as follows:

Buy:

The cost of the machine at the beginning of year 1 is $110,000. At the end of year 4, XYZ will dispose of the machine for a salvage value of $10,000. Assume the interest rate is 10%.

Lease:

To lease the machine, XYZ must make 4 equal payments of $32,000 at the end of year 1, year 2, year 3 and year 4. Assume the interest rate is 10%.

Required:

Compute the present values of buying vs. leasing the machine and state which is the better deal.

(You may use one or both of the two present value tables I have provided to you). You will not receive any credit if you simply write “buy” or “lease” – you must write out the present value computation

for both alternatives to receive any credit.

Answer 1

Note

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