Question

• Given the information below, answer the question.

Sunshine Hotel needs new laundry equipment. There are two alternatives, either buy or lease the equipment. The hotel owner is asking your recommendation to pay less for the equipment.

	Buy ($)	Lease ($)
Cost of equipment	20,000
Semi-annual equipment rental		3,000
Salvage value after five years	1,000
Annual costs:
Labor	15,000	15,000
Supplies	1,000	1,000
Utilities	3,000	3,000
Interest expense	1,500	-
Repairs	200	-

Prepare a five-year cost schedule for each alternative (Include only relevant costs).  

What is the cost if the owner buys or leases the equipment?

A. Buy: $ 28,500; Lease: $15,000

B. Buy: $ 27,000; Lease: $30,000

C. Buy: $ 27,500; Lease: $30,000

D. Buy: $ 25,100; Lease: $18,000

Answer 1

Buy
	Particular		Amount
	Cost of Equipment		20,000
Less:	Salvage alue after 5 years		1,000
Add:	Interest Expense for 5 Years	1500*5	7,500
Add:	Repairs for 5 Years	200*5	1,000
	Total		27,500
Lease
	Particular		Amount
	Equipment rental for 5 Years	3000*2*5	30,000
	Total		30,000
Note:	Labour, Supply and utilities expenses are irrelevant for decision making as they will be same irrespective of the decision made.
	Therefore, the answer is C. Buy 27,500 ; Lease 30,000